Posted by: usset001 | October 6, 2011

Conditioned seasonal analysis of in the corn market – an unpleasant (and not necessarily valid) view of the current market situation

My last post reviewed the September collapses in the corn and soybean markets, focusing on other years when prices declined more than 10% in the month of September. I want to continue the analysis with a further look at these years. In particular, what happened to corn prices in the months following the September collapse?

By the way, this sort of analysis is called a “conditioned” analysis of the market. The concept is to select a group of years that meet or share a certain condition(s), then analyze the group in search of similar price patterns. The “condition” shared is important. I’ve seen conditioned seasonal analysis that bordered on the absurd, such as commodity prices in years when a Democrat won the Presidency, or stock prices in years when the NFC football team won the Super Bowl, etc. I’ve also seen conditioned analysis that made a lot of sense, such as corn price action in years when Illinois rainfall is substantially lower than average.

I confess to you upfront that the condition considered in the following analysis – years when prices declined more than 10% in the month of September – is not particularly compelling. I think many people would argue that the underlying fundamental situation this year is different, compared to other years in this analysis. Also, my number of similar years is very small (in the case of corn, just 4 years since 1949).

With these “hedges” in place, let’s look at recent years with similar September price action in corn.

<Jul’12 corn contract> September 2011 collapse: Jul’12 futures started the month at $7.60/bushel and closed the month at $6.19 (19% lower)

October thru expiration:  ???

<Jul’97 corn contract> September 1996 collapse: Jul’97 futures started the month (closing prices) at $3.54/bushel and closed the month at $3.14 (11% lower)

October thru expiration (almost 10 months): $3.14 per bushel would prove to be the highest price until expiration, including a small and brief return to $3.14 in early April, 1997. The Jul’97 contract spent most of the time trading in a range of $2.70-2.80 per bushel, another 10% lower than the end-of-September close.

<Jul’05 corn contract> September 2004 collapse: Jul’05 futures started the month at $2.61/bushel and closed the month at $2.30 (again 11% lower)

October thru expiration:  The Jul’05 contract spent most of the time trading in a range of $2.10-2.30 per bushel, with the only significant rally occurring in the last three days prior to expiration.

<Jul’09 corn contract> September 2008 collapse: Jul’09 futures started the month at $6.10/bushel and closed the month at $5.40 (13% lower)

October thru expiration:  The Jul’09 contract steadily sank to the $4.00 level by late November, then traded in a range of $3.50-4.25 thru expiration.

This imperfect analysis does not bode well for corn prices over the next 10 months.


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