Corn Affected by Drought in Twelve Provinces and Regions; Market Outlook Depends on Weather and Temporary Storage Auctions

Since July, Liaoning has been hit by its worst drought in more than 60 years, with some farmland facing total crop failure

Twelve provinces and regions hit by drought, Liaoning and Jilin worst

Corn outlook: first weather, second temporary storage auctions

■ Cheng Tong

Affected by the El Nino phenomenon, since July, many places in China have experienced moderate to severe meteorological drought. Henan, Shandong, Shaanxi, Inner Mongolia, Shanxi, Xinjiang and other 12 provinces and regions have been affected by drought. Some areas in central and eastern Henan reached extreme drought, and Liaoning suffered its most severe meteorological drought in more than 60 years, with some farmland facing total crop failure. The meteorological department forecasts that there will be no precipitation significantly alleviating the drought in Liaoning in mid-August, and clear and hot weather will continue.

Drought weather has boosted corn futures prices. After entering the critical growth period for corn in July and August, the price of the 1501 corn futures contract has risen from the lowest point of 2287 yuan/ton on July 15 to the highest point of 2414 yuan/ton on August 13, an increase of 5.55%, hitting consecutive new highs. As of August 14, the closing price of the main corn C1501 contract was 2400 yuan/ton, up 1 yuan/ton, and the closing price of the 1409 contract was 2540 yuan/ton, up 21 yuan/ton from the previous day's closing price.

After a round of speculation, the future trend of corn futures depends first on the “face” of the weather, and second on the situation of temporary storage auctions. Corn futures may remain strong in the future.

Drought boosts futures prices

Recently, domestic corn futures prices have continued to climb. The rise of the 1409 and 1501 contracts is closely related to the drought that occurred during the important growth period of corn this year.

“The drought in the Central Plains region has led to total crop failure of corn in some areas, which has a certain impact on corn output this year, but what is more serious is the drought in the Northeast production areas,” said Sun Yu, an agricultural products researcher at Galaxy Futures, expressing concern about the drought.

Jilin Province is an important corn production area. In early August, the province's average precipitation was 9.5 mm, 82% less than the same period in normal years. “Corn is currently in the grain-filling stage, which is an important period determining corn yield. At this time, precipitation is low and sunshine is excessive. Drought is relatively unfavorable for corn grain filling, will affect kernel formation, and ultimately affect yield,” Sun Yu said. If the drought further develops later, corn output in the Northeast region will be seriously affected.

Temporary storage auctions may trigger catch-up gains in futures prices

Since 2013, temporary storage auctions, as the main channel for purchasing corn, have become a weather vane for measuring supply and demand in the spot market through their transaction rates and transaction prices.

Affected by the drought, in the temporary storage auction held on August 13, all 2012 corn from Liaoning Province was sold, with an average transaction price of 2310 yuan/ton; the transaction rate for 2012 corn from Inner Mongolia was 44.16%, with an average transaction price of 2152 yuan/ton, and the transaction rate for 2013 corn was 88.11%, with an average transaction price of 2432 yuan/ton. The high transaction rate and prices of this temporary storage auction show that a certain degree of tightness has already appeared in the spot market.

Some analysts pointed out that due to the advantage of temporary storage prices, all inventories in the hands of farmers and traders flowed into the state temporary storage, and grassroots grain sources may have been swept clean. This temporary storage auction in Liaoning was fully sold, indicating that spot goods are already tight, and futures prices may rise further to catch up.

Global corn supply and demand are loose

In 2014/15, global total corn production continued to increase, while consumer demand showed no improvement, causing ending carryover stocks of corn in China, the United States and globally to increase. The August USDA report showed that global corn ending stocks for 2014/2015 were estimated at 187.82 million tons, an increase of 16.73 million tons year-on-year, with obvious inventory pressure; the estimated ending stocks for the United States in 2014/15 increased by 0.07 billion bushels month-on-month and by 562 million bushels year-on-year, 2.2 times the ending stocks of the United States in 2012/2013.

Wang Shufei, an analyst at Huishang Futures, said that global corn supply is still increasing, while demand growth is limited, leading to an increase in the corn supply-demand surplus and an increase in ending carryover stocks. Ending stocks in China and the United States have surged. For China alone, ending stocks of 115 million tons account for 70% of total annual consumption.

With drought still present in inland and Northeast regions, short-term speculation is expected to continue, but the upside is limited. If the drought is alleviated in most parts of the country, prices may fluctuate and fall back.”

From the post-settlement open interest, in terms of total open interest of each contract, the top twenty long positions totaled 168202 lots, and short positions totaled 193671 lots. Regarding the later trend of corn futures prices, the market has already shown divergence, with bulls and bears each holding their own views.

Sun Yu believes that “at this stage, under the combined effect of positive factors, corn futures prices have risen continuously. Later weather effects and temporary storage auction conditions will directly determine the price trend. It is expected that prices will remain strong before then.”