Corn Prices Form a Bearish Divergence but Supply Concerns Could Push Them Higher
- Market demand is currently the strongest driving force.
- There is an anticipated wide-scale disruption in supply.
- The global post-COVID-19 economic recovery remains the strongest foundation.
Corn prices continue to soar as prospects of a much-improved global economy spur investor confidence. US Corn futures started the year on a high, and the momentum saw the commodity end the week at 496.6, higher than Thursday’s close of 494.00.
Corn prices have been boosted by strong demand from China, supply disruptions in South America, a weak dollar, and rising crude oil prices. However, the current price rally is mostly demand-driven, but this is expected to change as supply forces dig in.
Expect increased demand from China
By the end of 2020, China had committed to purchase 11.6 million metric tonnes (MT) of corn from the US. This is a great improvement from the previous year’s 60,000 MT.
It gets better for US corn. The United States Department of Agriculture (USDA) reported that by November 2020, out of the 11.6 million mt commitment, China had only imported about 2 million MT. This means that the bulk of Chinese imports of US corn are yet to be shipped. The expected increase in demand from China is, therefore, likely to drive corn prices higher.
Argentina and Brazil, the world’s second and third-largest exporters, have had unfavorable weather, which will likely result in reduced harvest. While light rains were reported in Southern Brazil from early to mid-December, the La Niña effects of the September-November early season will likely reduce farm yields.
Only 15% of Argentine corn yield is rated “good to excellent,” compared to 55% for the previous harvest. Besides, dry weather has resulted in a 15% reduction in corn acreage in the country. The Argentine government has already banned corn exports until the end of February. Meanwhile, Ukraine, the fourth largest exporter, also scaled down its corn yield forecast by 3 million MT because of drought.
International Grains Council (IGC) estimates that there will be an overall global production decline of 10 million tonnes for the 2020-21 season.
The projected decline in global production will translate to reduced supply in the market, thereby pushing corn prices higher.
COVID-19 and global economic growth
The rollout of the coronavirus vaccine has increased confidence in the growth of the global economy. Consequently, there has been significant improvement in the manufacturing Production Managers Index (PMI) of the world’s largest economies over the last two months.
Increased manufacturing will also translate to a higher demand for industrial ethanol, of which corn is the main raw material. The year 2020 saw increased production of ethanol, a key ingredient in the manufacture of hand sanitizers.
On the flipside, missed coronavirus vaccination targets may slow the growing confidence in global economic recovery. Therefore, pandemic remains a key influencer in corn consumption.
On the four-hour chart, we see that corn price has formed a double-top pattern at the $502 level. This is usually a bearish signal. Also, the relative strength index and the moving average convergence and divergence have formed a bearish divergence pattern. The price still remains above the 50-day and 100-day moving average and the ascending trendline.
Therefore, while the price will possibly have a pullback in the near term, the overall trend is bullish. It will remain so long as the price is above this trendline.