Rising Risk of Corn Price 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, with the near-month 1409 contract showing the most pronounced trend. In the short two months to the end of August, corn 1409 rose about 14.58%, and 1501 rose about 4.35%. Besides drought and supply issues, capital speculation was also an important aspect of the earlier rapid rise in corn futures prices. Now, with the recent easing of domestic drought conditions, the gradual release of the adverse effects of drought weather on corn output, and the imminent listing of new grain, corn futures, which have already accumulated substantial market risk during the rise, may face the possibility of concentrated risk release in the later period.
Weather Impact Has Been Gradually Digested by the Market
⟦NL> The continuous 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 drought conditions further deteriorating in early and mid-August. However, with the increase in rainfall since late August, drought conditions in some areas have eased. As of the end of August, according to the Office of 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 in the market. With the improvement in drought conditions, enthusiasm for weather-related speculation by capital 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 consolidation, and upward momentum has weakened. Weather factors have also been gradually digested in this wave of gains, and the main factors affecting corn futures price trends in the later period may shift to new grain supply.
Tight Supply of High-Quality Grain May Ease
For the earlier rise in corn, besides the impact of drought, the tight supply of high-quality corn in the domestic market was also an important factor. The country has abundant corn grain sources, but due to high-price procurement 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 began auctioning corn reserves successively in May, and imported corn also began participating in auctions in July, the auctioned corn was basically from 2012 and earlier years, and transactions were sluggish; although imported corn transactions were active, their cheap and low quality 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-price, 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 over 90%, far higher than the 13% transaction rate for 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 in the market will increase, spot corn prices will come under pressure, corn prices in some areas have already loosened, and corn demand merchants will accordingly lower procurement prices. Reflected in the market, corn futures prices will come under pressure.
Cautious Terminal Demand
The continuous rise in spot corn prices increased production costs for downstream feed enterprises, and some enterprises adjusted their policies toward relatively cheap wheat, further compressing the consumption space for corn; in addition, high prices also made downstream procurement cautious, and some manufacturers had corn inventories sufficient to 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 shifted to low-quality, cheap imported corn; in addition, Mid-Autumn poultry and meat stocking has basically ended, and after concentrated slaughter of hogs 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 also has 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 producers has been suppressed.
In short, after the simultaneous sharp rise in corn futures and spot prices, market and capital enthusiasm for corn speculation has cooled. Coupled with the imminent listing of new-season corn, corn, which has already accumulated a certain amount of market risk, will face great pullback risk in the later period.