Rising Risks for Corn as Prices Face a Pullback; Tight Supply of High-Quality Grain May Ease
Since June and July, corn futures prices have risen sharply, driven by drought weather and tight supply of high-quality grain. Among them, the nearby 1409 contract showed the most obvious trend, with corn 1409 rising about 14.58% and 1501 rising about 4.35% in the short two months to the end of August. In addition to drought and supply issues, capital speculation was also an important aspect of the earlier rapid rise in corn futures prices. As the recent domestic drought has eased, the adverse impact of drought weather on corn output has been gradually released, and new grain is about to come onto the market, corn futures, which have already accumulated substantial market risk during the upward process, may see a concentrated release of risk in the later period.
Weather Impact Has Been Gradually Digested by the Market
Persistent drought weather in the Central Plains granary and the main grain-producing areas of Northeast China in June, July and August caused varying degrees of difficulty for crop growth and drinking water for people and livestock. In early June, the drought began in Henan Province and gradually spread to almost the entire northern region as well as Jiangsu, Anhui, Hubei and other places. By the end of July, the affected crop area in major drought-stricken provinces nationwide had reached more than 72.3 million mu, and 1.6 million people and more than 2 million large livestock faced drinking water difficulties, with the drought further worsening in early and mid-August. However, as rainfall increased since late August, the drought in some areas eased. As of the end of August, according to the State Flood Control and Drought Relief Headquarters, the national affected crop area had decreased by about 20 million mu compared with before the rainfall.
The impact of drought on crop yield and quality has basically been reflected on the board. As the drought situation improves, capital's enthusiasm for speculating on weather has gradually receded, the trading activity of corn futures prices has declined, and the focus of capital will continue to seek the next hot issue. Recently, corn futures prices have shown high-level fluctuation and consolidation, upward momentum has weakened, and weather factors have also been gradually digested in this wave of gains. The main factors affecting the trend of corn futures prices in the later period may shift to new grain supply.
Tight Supply of High-Quality Grain May Ease
In addition to the impact of drought, the tight supply of high-quality corn in the domestic market was also an important factor in the earlier rise in corn. The country has abundant corn grain sources, but due to high-priced purchasing and storage, most corn is concentrated in state reserve warehouses, while the amount of corn circulating in the market is limited, especially high-quality corn grain sources. Although the state successively carried out corn reserve auctions starting in May, and imported corn also began to be auctioned in July, the corn auctioned was basically from 2012 and earlier years, and the transaction performance was sluggish; although imported corn transactions were active, because of its low price and low quality, it could not change the market's demand for high-quality corn grain sources. Therefore, in recent months, under the condition of tight high-quality grain supply, manufacturers were willing to accept high-priced, high-quality corn, and spot corn prices also continued to rise.
At the end of August, 2013 corn participated in auctions, with a transaction rate of more than 90%, far higher than the 13% transaction rate of 2012 corn, and transaction prices also rose considerably compared with the earlier period. With the participation of 2013 corn in auctions and the listing of new grain in October, grain supply on the market will increase, spot corn prices will be suppressed, corn prices in some areas have already loosened, and corn buyers will accordingly lower procurement prices. Reflected on the board, corn futures prices will come under pressure.
Terminal Demand Is Cautious
The continued rise in spot corn prices increased the production costs of downstream feed enterprises, and some enterprises adjusted their policies and turned to relatively cheap wheat, further squeezing the consumption space for corn; in addition, high prices also made downstream procurement cautious, and some manufacturers had corn inventories that could last for a period, with their current focus placed on spring corn and early-maturing corn about to be listed; for some enterprises with relatively small inventories, because the transaction prices of state reserve corn auctions were relatively high, some turned to low-quality, cheap imported corn; in addition, Mid-Autumn poultry and meat stocking has basically ended, and after concentrated slaughter of pigs and other livestock, short-term demand for feed declined. Therefore, under the dual impact of expectations for new grain listing and imported grain, the terminal market will also have strong expectations for a later decline in corn prices.
The overall situation of the deep-processing industry, another important area of corn consumption, is not optimistic. Demand in the alcohol industry has not kept pace with the operating rate, and alcohol sales, especially in the high-priced alcohol market, are sluggish. Although starch prices have risen, relative to the rise in corn prices, the production enthusiasm of starch production enterprises has been restrained.
In short, after the simultaneous sharp rise in corn futures and spot prices, the market and capital's enthusiasm for speculating in corn has cooled. Coupled with the imminent listing of new-season corn, corn that has already accumulated a certain amount of market risk will face great risk of a pullback in the later period.