Charlotte -

• My reads on real fundamentals in the corn market seem to be in disagreement, prompting the question of how i reconcile the difference. 

• I don't see basis and futures spreads in disagreement, but rather a view of different time frames.

• As expected, algorithms seem to be paying attention to the longer-term read of the May-July futures spread. 

A friend contacted me recently with a question about the corn market. He knows my view on corn, that it is at the top of my list when it comes to preferred investment markets and was curious as to how I reconcile recent conflicting signals. It is a solid question. 

Let me begin by reminding everyone I wrote a similar piece for Barchart back in September 2013, that one having to do with reconciling fundamental reads in wheat. At the time, there was a growing divergence between USDA’s global supply and demand guesses and what our reads on real fundamentals in Chicago wheat were showing us at the time. A sidenote: I would post a piece in June 2024 talking about how to gain an advantage when it comes to investing in commodities, with the third one to not be foolish enough to follow government reports. 

Back to my friend’s question this time around. He wrote: 

“The dynamics of your scheme (method) for analyzing grain markets is based on a well-defined sequence that can be summarized as 1) Basis 2) Spreads 3) Futures (also known as Grains’ Golden Rule, something I learned from listening to Tregg Cronin over the years). At present, in applying this scheme to the US corn market I note some indications that I cannot entirely reconcile unambiguously. If one refers to the basis of corn calculated in the manner you have explained several times, one finds it is a figure that certainly cannot be called bullish. In fact, the national basis (market) for US corn gravitates close to an area of lows. On the other hand, a look at futures spreads between different maturities shows the picture is clearly bullish…In your opinion, how can these conflicting signals derived from basis and spread be interpreted? And in light of this picture, with spreads and basis not pointing in one direction, what considerations can be made to the expected direction of the corn futures market?”

I appreciate my friends question. It shows me he takes the time to read what I post and to apply what I talk about to his own market analysis. 

As for my answer: 

Basis is indeed weak. As mentioned this morning (Wednesday, February 19), my latest calculations came in at 31.5 cents under March and 45.25 cents under May futures, both weaker than previous 10-year lows. Meanwhile, the May-July futures spread continues to cover a bullish 12.5% calculated full commercial carry (cfcc). How do I reconcile this? Let’s start with the National Corn Index (national average cash price):  

• Tuesday (February 18) saw the Index ($CNCI) calculated near $4.7050
  • Equating to an available stocks-to-use figure of 11.6%
  • The end of January was $4.4975 and 12%
  • Meaning available supplies have tightened in relation to demand during February
• However, with basis continuing to run weak we know that available supplies are not tight
  • The bottom line being there is still ample supplies to meet demand

We then look at futures spreads: 

• The March-May covered a bullish 26% cfcc in late December, only to have supplies move to town at the beginning of the new year, with the spread covering 63% at Tuesday’s close.
  • Indicating the increase in the National Corn Index created sales of cash supplies
• The May-July has consistently covered a bullish level of cfcc (less than 33%) since the summer of 2024
  • Indicating the US harvest was not as large as some projected
  • Reflecting concern US supply and demand could continue to tighten into the spring and summer
    • as us producers move into planting season, slowing the flow of remaining corn supplies into the pipeline
  • Also indicating concern over the slow planting pace of Brazil’s safrinha (second) corn crop (due to wet weather slowing soybean harvest)

Which brings us to the futures market: 

• Algorithms can see the weak carry in the deferred spread, and if that number is included in the equation it continues to signal the corn market as a buy
• If the May-July spread begins to follow the path of the March-May spread, particularly after the March futures contract moves into delivery at the end of this month (a Down Escalator Simulator), then buying interest in corn futures could start to cool

Does my method hold water? It works for me. We’ll see what happens this time around.