Frank Petricca is a branch manager and account executive with The Price Futures Group in St. Charles, Ill. He focuses on long-term approaches to commodity markets.
Warren Buffett is well-known for describing the market as a "slot machine" in the short term, but a "weighing machine" in the longer term.
In the longer term, market fundamentals matter, but in the short term, according to Buffett, it is nothing short of a "craps shoot" – Spin the wheel take your chance! – All very "catchy," but it does nothing to really help you time the market.
As I write this letter (Aug. 30) the short-term "slot machine” market in corn is punching out new contract lows.
Our American producers have done it again (so far), as expectations for a large harvest loom and huge ending stocks domestically and globally ensue.
The short-term corn bulls have been decimated as the corn market is presently going to where pain is causing massive liquidation.
While there is certainly despair regarding corn futures, in my mind this is just another exciting commodity opportunity that one should be focusing on.
The "weighing machine" or the longer-term fundamentals haven't changed.
Here are some facts:
- If the USDA were to lower their yield estimate by 2 or 3 bushels an acre, and ending stocks are revised lower, declines in ending stocks could eventually diminish quickly. The Pro Farmer crop tour last week did in fact lower yield 2 bushels an acre from this month’s USDA crop report.
- Ethanol use continues strong at 22 million bushels a day. Many experts think that the U.S. will use an additional 200 million bushels of corn for ethanol in August.
- Demand continues to be robust. As of August 16th, export inspections had reached almost 98 percent of the USDA's export projection for this marketing year. The five-year average is 93.3 percent.
At this rate demand will exceed export projections for the 2016/17 season.
- The best trader in the world (China) is loading up!
- China imported 3,100 metric tons of corn in April.
- China imported 383,200 MT in June.
- And a whopping 913,700 MT in July, the fourth highest on record.
China now owns 44 percent of the world’s corn supply.
We should also be cognizant of the fact that spot corn futures bottomed Aug. 31, 2016, at $3.01 and rallied up to $3.79 on Feb. 16, 2017.
Corn futures are in fact in the lower 25 percent of the long-term trading range and my long term formula is up where long-term accumulation is recommended.
Let me be specific...
It is my contention that corn futures are approaching lows not only for the rest of this year, but maybe for the next couple of years.