Commentary: Market reaction to corn number ignores fundamentals

by Ron Sterk
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Typically news that is termed "bearish" for a market results in lower prices. But grain markets have been anything but typical in the past couple of years, and the latest action in corn futures is no exception.

The first U.S. Department of Agriculture survey-based corn production forecast for 2008 was termed bearish because at 12,288 million bus, it was more than 2% above the average of trade expectations. But rather than go down, through Aug. 14 corn futures prices advanced nearly 60c a bu, or more than 10%, in nearby contracts since Aug. 11, the day prior to the report.

Several reasons were offered for the opposite-than-expected reaction, the most common of which was that the trade already had factored in the bearish report when the market declined for six consecutive weeks since the previous bearish report (June 30 U.S.D.A. Acreage), which in fact did send prices lower.

In the past if a bearish report was already factored into the market, the tendency would have been to call the actual report neutral.

Some said the corn market had become "oversold." Since record highs were put in on June 26, heavy selling prompted by the bearish Acreage report and including the exodus of a significant amount of fund money from corn and other commodity markets, corn futures prices dropped by a third, or about $2.50 a bu. That is a better explanation for the reaction.

Another factor involved in the upswing was continued concern over Midwest weather, which also appears less based in fact and more tuned to moving markets. Granted both corn and soybean crops are about one to two weeks behind "normal" development because of the late start to the season, but since the June floods receded, weather has been almost ideal. Unseasonably cool temperatures and adequate moisture have allowed crops to consistently improve. The latest U.S.D.A. condition ratings put 67% of the corn crop in the good to excellent categories, 11 percentage points ahead of this time last year. And reports from around the country would tend to support the good health of this year’s crop.

The market shooting higher on the hint of dryer weather in parts of the Corn Belt at this point in the growing season would appear inappropriate. And concern about an early frost damaging the late-developing crop also does not have merit based on meteorologists’ comments that it is impossible to predict frost this early and that a wetter summer is more likely to result in a late rather than an early frost.

In the end, some market moves defy logic, which has become all too common of an explanation for market activity in recent months.

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