Weather, ethanol, trade and ASF: corn trading's toxic cocktail

16 Aug 2019 | Tim Worledge

“Normally, at this time of the year we’d be trading 90% weather. At this stage, we’re trading 20 other things,” one South Africa-based corn trader said of his book, reeling off trade wars, ethanol demand, pigs and African swine fever, feed demand and feed wheat as just a handful of examples.

Collectively, the uncertainty has contributed to a tangible slowdown in trading activity.

In turn, this has lead to substantial price volatility, underpinned by managed money positions in the corn futures contract swinging from a record net short to the largest net long for 14 months.

Friday’s CFTC data will likely see the contract’s balance lurching back towards a net short again, with the whole rollercoaster playing out in barely a four-month spell.

“This is probably one of the most uncertain years in the past five,” the trader said.

Weather remains one of the biggest factors, as the long shadow of heavy rain that hindered much of the US corn planting window continues to sow confusion for global markets.

The USDA’s August update to its influential world agriculture supply and demand estimates precipitated the most recent twist, as it forecast a bigger-than-expected yield forecast that put the US on track for a 353 million mt corn crop.

That conflicts with some of the on-the-ground evidence, where late-planted corn has struggled to pollinate in some areas.

Meanwhile some estimates suggest up to 45% of the US corn crop was planted late, exposing it to risks of frost damage.

Most expect the US corn yield to be slashed as the harvest gets underway.

“There’s so much emotion in the markets now… It’s hard to have a conviction,” Kelly Herrick of Advance Trading told Agricensus.

“I talk to eastern producers and I get bulled up on the supply side. Then I talk to end-users and get bearish on demand,” Herrick said, adding that any clarity that emerges on US production likely might be offset by concerns about the state of demand.

“The ethanol piece is just downright ugly. There are lots of negative margins, and we’re entering into a seasonal stretch where it’s only supposed to get worse,” he said.

US ethanol has been hit by a triple blow – domestic demand reduced by the increased use of waivers excusing refiners from blending biofuels; international demand besieged by trade wars and anti-dumping measures; while African swine fever and trade obstacles have eroded into DDGS demand.

And then there's China.

“We were trading weather until the end of July and the market sort of forgot about the China story,” a Singapore-based trader said.

“But then, with Trump’s tweet, it came back to centre stage, and people walked away from the weather maps… Every trader will tell you that nothing can be traded because of the trade war – and you can see it in the results of multinational companies,” the trader added.

Overlay that patchwork with the renewed volatility in Argentina’s peso, and spill-over into Brazil’s real, and there can be little doubt that demand is suffering.

South Korea has uncorked its pent-up demand, hoovering up 600,000 mt since August 1 to buy in two weeks what the country’s feed sector had collectively bought over the last three months.

But it's a rare bright spot and the picture in Vietnam is very different.

Buyers there are wrestling with the challenge of African swine fever, and are holding out for lower prices even as a surge in freight prices this week cleared out CFR delivered corn offers on Thursday.

“No one offered yesterday… I heard they temporarily stopped offering because of the volatile market,” one Vietnam-based broker said.

Finding a strategy amid the inherently contradictory signals is proving difficult.  

“It’s the old Alaska saying,” Herrick concluded.

“You don’t have to run faster than the bear. You just have to run faster than the guy next to you.”