Corn futures and “short crops have long tails”

There is an old saying in the grain business that “short crops have long tails.” This saying describes price patterns normally seen when a crop comes up short; a quick price spike followed by a gradual return (the long tail) to prices seen before the spike.

I am preparing for a presentation in mid-September and I put together some graphics that illustrate the “short crop/long tail” phenomena. The accompanying graphs show the price spike in December corn futures during the last 5 intense short crop years, including 1974, 1980, 1983, 1988, and 1993. They also show the long tail of the December contract of the year following the short crop. One point to ponder: In each of these five example years, the December futures contract for the post-drought year was lower in price a year later than it was during harvest of the drought year (e.g. Dec’89 price in October 1989 vs. October 1988).

The 2012 drought is leading to a short crop as intense (and possibly more intense) than all of these years.

Why does this pattern occur (why do short crops have long tails)? When serious crop problems arise, prices quickly spike to reflect a smaller crop and available supplies. Over a longer time period, demand responds to higher prices and declines. Later in the crop year, higher prices promote more planted acres and production – this may not affect short term supplies but the market starts to look ahead to better supply prospects.