Export Demand Slows and So Does Corn

Thursday, September 1, 2011

Corn continues to have strong fundamentals going into the fall harvest. Crop health has continued to worsen as the growing season has progressed and weaker yields could result in another significant cut in USDA estimates. In the short-term, however, technical resistance, overbought conditions and lower demand could have a negative impact on prices. Many traders may look for a pullback to the 725-730 level. At that time, some traders may ng into a bullish strategy, such as a bull call spread or long futures powant to re-evaluate the technical outlook and possibly consider enterisition. If the market does show bottoming at these levels or a breakout for technical resistance from current levels, some traders may wish to consider a bull call spread, for example, buying the Dec Corn 800 calls and selling the 825 calls.

Fundamentals

Corn futures have rallied almost $1.75 since the beginning of July due to deteriorating growing conditions and faster-than-expected maturation of the crop. The quickening maturity of the Corn crop does alleviate some concerns that the harvest will be pushed back because of the late start to the growing season. However, there is concern that yields could be significantly reduced as a result. The US growing region has been plagued with extremely dry conditions, and there is little chance of significant rain over the course of the week. There has been a significant reduction in the percentage of crop rated good-to-excellent as a result of the dry conditions. The supply side certainly suggests that prices will be supported. The current price of Corn may lessen demand from importers, who may opt to go with South American suppliers instead. Corn could see some selling pressure in the near-term, but fundamentals rest squarely with the bull camp over the longer-term.

Technical Notes

Turning to the chart, we see the December Corn contract running into resistance at the 775 level and failing to initially break through. In addition to resistance at 775, significant resistance can be seen at 800 -- a level that the market briefly flirted with in June --but failed to break through. In addition to running into technical resistance, the RSI is at overbought levels, which could give longs a reason to take profits. If prices correct, fairly significant support comes near 725-730.

Rob Kurzatkowski, Senior Commodity Analyst