Afternoon Corn: China corn speculation keeps the bear on the hot seat

Afternoon Corn:  China corn speculation keeps the bear on the hot seat

The corn market featured a surprisingly wild ride today, establishing a ten cent intraday range. The lows were made early in the night session, and the highs were made shortly before the close. The end result was a six cent higher finish and a six month high close for Dec corn futures. Managed Money traders likely continued to dance on the long side of the market and are believed to be net long about 45,000 combined futures and options. Cash markets were mostly steady today, though a couple locations tried to gig bids lower, perhaps with an eye toward pending harvest activity.

Today was another day that likely had more style than substance. China stories and rumors continue to capture the imagination of the bull. This time, it was a Reuters article detailing potential production losses of 5-10 mmt corn due to a recent typhoon (which sounded a little familiar to Iowa's infamous 'derecho' event!). We have run the gamut here; China is dealing with a multi-year corn destocking effort, the potential flooding of some reserve stores, the rebuilding of its decimated hog herd (animal numbers reported up 30% yr/yr off a low base), and now wind/water issues tied to NE production areas. All we need is a good plague of locusts?! But in all seriousness, China clearly wants corn; they are not booking large quantities of U.S. corn 'just' to satisfy Phase One commitments. One key to the market will be sorting out just how much corn they will want to buy in 20/21, both here and abroad. They already have close to ~10 mmt U.S. on the books; some credible estimates say that could rise to 20 mmt before all it said and done. Point being, the market does not 'know', which in turn is driving much of the recent market enthusiasm.

Other export news was not quite so bullish. South Korea's KOCOPIA passed on an overnight tender, with offers said to be about $3/mt (or 1%) above the high-end of what they were willing to pay. Taiwan bought a cargo of corn from Argentina. Export sales in the morning are not expected to be too exciting for corn. Over the reporting period, there was just 102,000 metric tons in announced sales. With non-China interest still rather subdued, we suspect total new business could fall short of 1 mmt (we forecast 800k to 1 million, officially). The 8 AM sales announcements could prove to be more meaningful; there were none for corn today, but China was back after beans.

The ethanol data in the weekly EIA report leaned friendly relative to expectations for the ethanol market. Ethanol production declined -1.5% to a 926,000 bbl/day rate; over an entire marketing year, such a rate would consume 4.90 billion bushels of corn. Blender demand rebounded in-line with our expectations, adding more than +1.5% wk/wk, which helped stocks remain in draw mode, falling another -1% to 831.5 million gallons, which is within a few mil gal of a four-year low. Ethanol futures managed two cent gains today, and the crush gained a few fractions of a cent. Ethanol margins have had a tough start to Sept, eroding since the start of the month (mostly due to corn gains). Despite this erosion, we still think most Midwest producers are making modest 5-10 c/gal profits today, when including all costs.

Elsewhere, U.S. forecasts remain very conducive toward harvest activity; both 6-10 & 8-14 day maps suggest warm/dry conditions into months' end. This should promote an aggressive harvest pace, which could add some hedge pressure, particularly on rally days. May see a classic 'transfer of ownership' if funds want to get long and farmers want to sell, assuming both parties move in that direction? Argy and Brazil will start getting more play as we get closer to first crop planting. Broiler hatchery data after the close found broiler hatchery egg sets up 2% yr/yr, while chicks placed was still slightly lower on a yr/yr basis.

In options action, volatility was surprisingly little changed despite the wide range and 'new high' print. Late, 2,000 Oct $3.75 Calls were purchased near 3 cents average. 1,000 July (2021) $5 Calls were also bought, paying 3 ¾ cents. Calendar spreads were firm, particularly between crop years. Corn lost to the beans, but was mixed/better versus the wheat. Technically, it is increasingly looking like $3.50 corn will be major support for an extended period of time, with the gap-higher just below there staying open for now. Futures are trying to break out above $3.65 resistance and did a much better job today in sticking that landing. Keep an eye on tomorrow's finish? Formation objectives suggest an upside target in the $3.75-$3.80 area if we keep the bull charging.

KJ