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Todd's Take
Tuesday, May 31, 2016 3:33PM CDT

By Todd Hultman
DTN Analyst

As we cross Memorial Day off the calendar and head into the growing season, 2016 has already distinguished itself with the most bullish start in spot soybeans since 1997. Riding on soybeans' coattails, spot corn just posted its highest close in ten months on Friday. Things are looking up.

For those who think market clues aren't important and only USDA estimates matter, this recent bullish enthusiasm for grains has been difficult to explain. According to USDA, the U.S. is going to have a 14.4 billion bushel corn crop and 2.15 billion bushels of ending stocks in 2016-17, the most excess corn since the 1980s. However, as we head into June, the corn market seems to have a different opinion.

2016 marks the fourth growing season since the drought of 2012, a reasonable place for prices to have found their low point by now. The first technical sign DTN noticed that the bear market was ending came back in October 2014 when an outside reversal on the monthly chart coincided with an upward turn in the stochastic indicator.

The 18 months since that reversal have been marked by choppy trading in which low prices demoralized traders, but held sideways. Bullish sentiment, as measured by the percent of noncommercial contracts held long, slid from a moderately bullish 63% after the October 2014 reversal to a bearish 44% on Apr. 4, 2016. The low point in sentiment came shortly after USDA announced its big corn planting estimate of 93.6 million acres.

Often, it turns out many of the market's best clues are the things it does not do and that was true in early April. As bearish as the mood for corn was at that time, spot corn prices never exceeded the low set back in 2014 -- a bullish hint that all the bearish talk had lost its impact on prices.

The other bullish clue that corn presented this spring was its uncommonly narrow six-month trading range. You may recall the article "How Quiet Is It?" written back on March 22 where I explained why the quietest six-month trading range in 20 years was potentially bullish for soybeans. The same reasoning also applied to corn in the first two weeks of April when its six-month range reached its narrowest point in 13 years.

In early April, corn's six-month trading range measured less than 12% of its low boundary and much less than the four-year average range width of 36%. In this case, trading in corn was being restricted by a lack of bullish hope on one hand and disciplined selling restraint on the other, as producers successfully held back from releasing grain at unprofitable prices.

As I explained for soybeans in March, uncommonly narrow trading ranges like these are the sign of an unhealthy market and are not sustainable. Long-term, markets need to distribute beneficial opportunities to both consumers and producers, and in this case, corn producers were being left out. The breakouts that eventually end these situations are worth paying attention to.

From a technical point of view, last week's close in July corn at $4.12 3/4 was a clear, bullish breakout from a failed trading range. Even if the breakout only serves to re-establish a more normal trading range of 36%, the upper boundary projects to $4.72 a bushel in the near-month corn contract -- a much more profitable opportunity for producers.

Yes, corn has had some help from fundamental changes since early April. Planting delays in Texas and parts of the Midwest will likely entice some acres to soybeans and we don't really know how good USDA's 93.6 million acre estimate ever was anyway. Notice however, that these fundamental explanations often come after the fact.

The future is subject to surprise and a 2016 corn crop of 14 billion bushels or more is still viable. But as has often been the case, the best clues of the market's future direction come from corn prices themselves. In light of the narrow range that corn prices held when all the talk was bearish earlier this spring, last week's bullish breakout just added more weight to the case for higher corn prices in 2016.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1



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