A few weeks ago, having been out of touch for a while, I called in from overseas, and, being the barbarous relic that I am, I asked what the corn basis was doing. Central Illinois was paying 35 over March futures I was told. And what was the March-May spread I asked? 8 under was the reply. I should have been gobsmacked at the disparity between cash and futures, but I was not, I have come to recognize that convergence of cash and futures in the grain market these days, is nothing more than two ships passing in the night. The delivery mechanism is all but useless to the domestic users who consume 85 percent of all the corn in the country. Need corn in Decatur, IL on July 1st? "Mister, here's your corn in a clapped out, broken down trailer in Deadwater, Alabama on July 15th. The place is crawling with chickens, and there ain't no mechanic for miles". The entire structure is heavily biased against using futures for delivery therefore the usual early warning signals from the cash market do not function. Every long in the delivery period is seen by the CFTC as a budding Bunker Hunt. On top of all this, the domination of high frequency trading makes a mockery of price discovery. If your horizon is 3 milliseconds, the message that we are going to run out of corn in four months carries all the urgency of a warning that you are about to die in 3,000 years.

David Fuller's view In assessing the US corn market outlook, there are a number of factors to consider starting with the WASDE Corn End Stocks report issued on 12th January, and the new crop which will be sown shortly.


Starting with the latter, John Macintosh told me today that unlike the two previous years, weather conditions in the US Corn Belt are benign, being warm and with sufficient moisture. This suggests a favourable start for the new crop, scheduled for harvesting in September. More importantly, he also remains highly sceptical regarding the accuracy of January's Corn End Stocks figures. I have a very high regard for John Macintosh's views, and not just on corn, having known him for many years.

When confronted with conflicting views, which is certainly not uncommon in the markets, Fullermoney's preference is to look at the price charts. I could not persuade myself to buy corn (weekly & daily) just before the WASDE report last January because it was on a stalk (pun intended), having risen sharply from its mid-December lows. Also, the weekly chart showed considerably more overhead resistance than underlying support. Corn fell sharply following the January report, as you can see on the charts, before finding support in the $6 region once again and slowly moving back to the upper side of its range since last October. It now shows more underlying support and is also back above the 200-day MA which has flattened out following a gentle decline.

If I weigh the evidence from the USDA versus John Macintosh's view, would corn be trading back near its January highs if there was plenty of corn available? Probably not, in my opinion. Additionally, would old crop corn be in backwardation today if it there are sufficient supplies to satisfy demand before the new crop becomes available? Again, probably not. John Macintosh's report also mentions that corn in China is currently trading at $10!

In conclusion, I think the technical evidence supports John Macintosh's bulish view. Consequently there is scope for a scarcity rally in old crop corn contracts.