While most Americans got a head start to the long Labor Day weekend by knocking off early Friday, corn futures traders had their most active day in 133 years. According to Drover's, a record 556,034 corn futures contracts (the equivalent of 2.8 billion bushels of corn!) changed hands last Friday, marking the single busiest day in the corn markets since the Chicago Board of Trade began trading grain in 1877. The amount of trading last Friday was essentially double the normal rate. So much for a quiet and relaxing holiday weekend. As I discussed here last week, the recent flurry of activity in corn market is undoubtedly being driven by the resurgence of speculators. Hedge and index funds are descending on the corn market in numbers not seen since the spectacular commodities bubble of 2008. Over at the ETFdb blog, Michael Johnson had this to say about speculators and last Friday's corn market action: "...the record trading volume and impressive price rally likely indicates that speculators have waded into corn markets, a potentially important development that could make market movements even less predictable in coming sessions." Less predictable indeed. The movements of the market become sufficiently more exaggerated when this many speculators are in the game. The highs are higher, the lows are lower, and everything happens faster. In other words, hang on to your hats. Speculators are betting that Friday's supply and demand estimates and crop production report from USDA will reveal tighter global grain stocks, higher exports of U.S. corn and wheat, and lower U.S. corn yields and overall production. Dow Jones Newswire's survey of analysts shows that the trade is expecting an average corn yield of 163.1 bushels per acre in Friday's report, down from USDA's August estimate of 165. On average, they expect the crop size to be 13.199 billion bushels, versus USDA's last estimate of 13.365.Â Many analysts suggest the market is already trading those numbers. Of course, lower production and higher demand for U.S. crops would fundamentally serve to take prices higher, depending on the magnitude of USDA's adjustments. But because speculators are running roughshod on the corn pit right now, the market's response to such a report will surely surpass what would be justified purely by supply and demand fundamentals. As Johnson at ETFdb points out: "As investors have rushed to the exits of equity markets, it wouldn't be surprising if some large institutions were trying their hand in commodity markets. Often times, the arrival of speculators into the futures market for a particular commodity can translate into [a] big run-up in prices. But of course there is a flip-side to that coin; when speculators leave the market, prices can crater in a hurry." So while the response from speculators to Friday's USDA reports is likely to be frenzied and frantic, here are some things for the rest of us to keep in mind:
- Even if the analysts are right about the size of the 2010 corn crop, it will still be a record. And assuming they are right about average yields, we'd still be very near the record yield achieved last year. Given the excessive rain and flooding in some parts of the Corn Belt, and extreme hot and dry August conditions in other parts, a record crop and near-record yield would still be a remarkable achievement.
- The crop is still a long way from being "in the bins," meaning it's still too early to conjecture too much on average yields. As of Sep. 5, only 6% of the crop had been harvested, mostly in areas that had too much rain or too much heat this summer. The states with the best-looking corn (Nebraska, Minnesota, and South Dakota, for example) haven't started harvesting yet. USDA's latest crop progress report showed 69% of the crop remains in good or excellent condition, identical to last year and far above the five-year average.
- It's also too early to know the extent of the crop losses from the drought in the Former Soviet Union and the effect it may have on U.S. exports. Certainly, the ban on Russian wheat exports and speculation that wheat output from the FSU region will be severely reduced is the underlying driver of the current grain price situation. But just this week the Russian Deputy Ag Minister said the situation there doesn't warrant "panic" and the U.N. Food and Agriculture Organization agreed that the situation doesn't constitute the "global crisis" that some have made it out to be.
- Let's also not forget that global wheat stocks heading into this year were at their highest level since 2001/02. Carry-out stocks of wheat from 2009/10 are 63% larger than stocks during the 2007/08 commodity bubble. The amount of stockpiled wheat will go a long way in shoring up the drought-induced losses occurring in the FSU.
- While demand for U.S. corn exports may pick up as a result of the wheat situation in the FSU, domestic corn demand is not increasing. USDA's August report indicated domestic corn usage in 2010/11 (primarily for livestock feed and ethanol) will be less than 1% higher than in 2009/10.