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In This Issue:
Donna Heidkamp discusses the production of
Corn and the effects of supply and demand.
|October 18, 2007||TraderSavvy.com | Read Past Issues|
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A Fundamental Look at Corn
Corn is typically the largest revenue-generating crop in the United States, and its importance in our economy continues to grow as new uses are continually developed. Historically, the price of corn drops during harvest season, as a result of large supplies entering the cash market. With one of the largest crops on record at 13.318 billion bushels expected, according to the most recent U.S. Department of Agriculture report (USDA), the corn market is trading in a sideways channel. It has been a tug-of-war of sorts, between continued forecasts for strong global demand, the acreage war for next year versus a large crop domestically, and a recent reduction in ethanol usage.
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The Growing Season:
Corn is considered to be one of the more difficult crops to grow. The corn plant is tall and thin, and therefore requires a good root structure to support the plant. Topsoil and subsoil moisture are critical in many stages of development. Therefore, it can be an expensive crop to grow—due to the costs associated with irrigation. It is important to note that lack of adequate moisture tends to be more common than excessive moisture. But excessive moisture, to a point of standing water in the fields after planting, can also be detrimental to the final yield.
The planting season takes place in the U.S. from late April through early June. Many believe that the odds of producing good yields increase if the corn crop is planted by mid-May, because the plant is especially vulnerable to yield loss if it is exposed to extreme heat and dryness during tasselling and pollination (which occurs from mid-July through mid-August). Improved seed quality and faster varieties could also limit the risk of yield loss if the crop is planted during late May through early June. For more global crop calendars, you can request a complimentary copy of the 2008 Hightower Commodity Reference Guide from RJOFutures.
The kernels develop during the pollination period. Therefore, the mid-July through early August time frame is considered the most critical period of the growing season. The number of kernels developed has the biggest impact on the final yield. Excessive heat and lack of moisture would be considered bullish this time of year for the corn market. By late August to early September, very little can affect the final yield outcome. Some of the risks associated with late yield reduction include early frost, root rot, root worm, and beetles.
Supply & Demand:
The primary factors currently affecting the supply & demand situation include the push for ethanol, a weakening dollar, and renewed strength in emerging markets.
The dollar has been declining since peaking in 2001 – 2002. Its weakness is allowing consumers to purchase our goods and services at favorable exchange rates. Therefore, the export demand has steadily grown—contributing to price inflation for food. Inflation impacts our buying power, which could encourage the Fed to tighten monetary policy—rather than loosen monetary policy. A weak dollar contributes to inflationary pressures in the U.S., and could help support commodity prices.
According to the USDA Economic Research Service, “income, population, and the rate of economic growth in importing countries have long been recognized as key determinants of foreign demand for U.S. agricultural products.” This statement leads us to immediately think of China, with a population of more than one billion people and a double-digit growth rate. As economies develop, nutrition improves, and demands for food increases. As a result of increased food inflation recently, the Chinese government has lowered import tariffs to attempt to build supplies and contain their cost of food.
According to the Foreign Agricultural Service (FAS) (www.fas.usda.gov), China is expected to be a net exporter of corn in the 2007/2008 crop year of approximately 3 million metric tons. Their export trend has been declining over the past 5+ years. China is expected to become a net importer of corn in the not so distant future. Since the U.S. accounts for approximately 60% to 70% of the world export market annually, this trend will likely support our market for years to come. Argentina and Brazil rank second and third behind the U.S. as leading exporters on the world market, with approximately 19% and 9% market share respectively this year. Japan, Mexico, and the European Union are the leading importers of corn on the world market.
Ethanol production has grown significantly over the past few years. According to a federal mandate, the U.S. is expected to increase ethanol production to 26.5 billion liters by 2012. According to the USDA projections going out to 2016, the percentage of U.S. corn used for ethanol was approximately 14% in 2005/2006. By 2016/2017, approximately 31% of the domestic corn crop is expected to be used for ethanol production. To meet this demand, the government is expecting a decline in export sales. It is important to understand that these are simply USDA projections. The profitability of ethanol plants are highly correlated to ethanol prices, corn prices, natural gas prices, and ethanol yields. To continue meeting long-term growth projections, the industry must continue to be profitable. The 2008 Hightower Commodity Reference Guide, which I mentioned earlier, also offers expanded coverage of biofuels and energy.
The long-term forecast for corn prices continues to be very bullish, as
global demand continues to grow. As the prices for commodities
continue to soar, volatility will increase. And it will become more and
more important to keep a solid opinion of the longer-term trend in the
back of your mind when formulating trading strategies.
The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
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About Today's Author:
Sr. Trading Advisor, RJOFutures
My interest in the futures industry stems from strong family ties to production agriculture in Hereford, Texas. After completing a bachelor's degree in Agricultural Economics at Texas Tech University in 1995, I moved to Chicago to participate in the Chicago Mercantile Exchange Agricultural Broker Training Program. The program exposed me to all facets of the futures industry, enabling me to work with experienced floor traders and develop a strong understanding of the intricacies of trading in the futures markets.
Since completing the training program in 1995, I have continued to gain a well-rounded knowledge of the industry by working as an order clerk, trading desk manager, and broker for RJOFutures. In 2004, I started a branch office of RJOFutures to focus my efforts on helping clients meet their trading goals. By identifying client objectives, managing risk, and providing a carefully tailored service, I serve as a dedicated liaison on all trading floors to full-service, broker assist, and on-line clients.
In order to continue to better serve my customers in an ever-evolving and dynamic industry, I also completed a M.S. degree in Financial Markets and Trading from the Illinois Institute of Technology in May of 1999.
RJOFutures is the retail division of R.J. O'Brien, one of the oldest FCMs tracing its history back to 1914.
To learn more about RJOFutures, visit www.rjofutures.com