The markets may be fairly quiet as we lead up to the weekend, but there was a lot of volatility in agricultural commodities this afternoon. The US department of Agriculture released its grain production report for August. This data confirmed what we had expected: the corn crop has shrivelled due to the drought in the mid-West. US Corn production fell to 10.779bn bushels from 12.970bn in July, the lowest level since 2007. This is a major disappointment as earlier this year the USDA had expected 15bn bushels of corn to be produced.
Corn yield crashes
The extent of the decimation of the corn crop was revealed in the corn yield, which fell to 123.4 bushels per acre, the lowest yield since 1996. Supply is likely to remain constrained for some time, while demand is likely to remain stable and possibly even rise in the medium-term as the global population continues to expand. The corn price spiked sharply post the report and could be on the way to $900 in the medium term (the price represents one futures contract which is the equivalent of 50,000 bushels).
Another leg higher for the corn price?
This has important ramifications for traders: 1, it suggests there could be some volatility in the corn price in the coming days and weeks. The USDA production report is a bit like the NFP’s of the commodity world and tends to create some whipsaw action. Once the dust settles post today’s report it will give us a better idea of the longer-term trend in the corn price. Overall, no one expects corn to keep moving higher, as eventually new production will come on board to make up for the supply bottle neck. However, this supply constraint is a bit more complicated since the US is by far the world’s largest corn producer, and the outlook for the corn crop is dependent on the weather and the end of the drought, which remains in full swing in the mid-West. However, in the next 12 weeks the drought is expected to ease off slightly. However, the weather is so unpredictable it is hard to tell with much accuracy when corn production can come back on track. This uncertainty is what the market is reacting to and what could keep the corn price moving higher in the coming days and weeks.
EURUSD ends the week on an important low note
Corn and the agricultural sphere may be grabbing the headlines today, but there has been some important developments in price action. EURUSD has come off sharply as Spanish and Italian bond yields start to show signs of stress once more as 2-year yields start to rise at a faster pace than 10-year yields. This move came after the credit rating agency Fitch said that holders of the debt of some Spanish banks may be expected to take a haircut as part of the banking sector bailout Madrid has requested. Markets don’t like it when investors get burnt hence the movement in Spain’s yields. Below 1.2250 in EURUSD opens the way for a sharper decline towards 1.2050 – the low from late July. It has been an important week for the euro. Earlier this week it looked like EURUSD was in recovery mode, but then it backed away from 1.2540 – the base of the Ichimoku cloud and the end of the technical downtrend. This may mean that the bulls are not strong enough to push the euro into a new paradigm and thus a break lower towards 1.20 is still on the cards. We think this pair could trade within a 1.2040 – 1.2450 range in the next few days since the economic and political calendars are fairly light this week. Although this could be the calm before the storm as September is gearing up to be a big month with Dutch elections and a Greek debt redemption payment and budget vote scheduled for September.
One to watch: AUDUSD
Weak Chinese trade data has also caused some worries about the outlook for global growth, which has taken the shine off the Aussie. A break below 1.0500 now looks possible after this cross rebuffed a move higher towards 1.0600. If risk sentiment continues to decline then AUDUSD could move back towards the 1.0460 in the near-term, which is the double bottom from early August. The daily RSI has also started to turn over suggesting that there could be further downward momentum to come, although 1.0500 is likely to be fairly sticky and this pair could be a sell on a move back towards 1.0530/40.
AUDUSD: Daily chart