Posted by: usset001 | March 13, 2012

Corn price direction in the spring

Corn stocks are tight and it shows in two different ways; an inverted futures market and a strong basis. What does this suggest for cash corn price direction into the spring?

CBOT corn futures prices in the corn market are showing a strong inverse (i.e. nearby prices higher than deferred prices) from old to new crop. Since January, the Jul’12 corn contract has traded at a 50-80 cent premium to the Dec’12 (new crop) contract. Inverses from old to new crop futures are not common in corn, and generally occur in years like this year, when ending stocks of corn are projected to be very tight.

In addition to the strong inverse, Minnesota famers are enjoying a strong corn basis (i.e. cash prices high relative to the futures price). Like inverses, a strong basis is not common and generally occurs when stocks are tight.

I want to do a little “similar years” analysis and see if we can get a sense for price action in the spring, in years since 1990 when ending stocks were tight and old crop/new crop futures prices were inverted. Six crop years met my criteria of having a stocks/use ratio of 11% or lower: 1993/94, 1995/96, 1996/97, 2003/04, and 2010/11 (see table below). For perspective, keep in mind that the average stocks/use ratio was about 50% higher in all other years since 1990.

Years with Tight Ending Stocks and a Jul/Dec Futures Inverse, 1990-2012

Crop Year*

Corn

Ending Stocks/Use** (%)

Mid-March Jul/Dec Inverse**

($/bu.)

1993/94

10.2%

0.25

1995/96

4.1%

0.62

1996/97

10.7%

0.12

2003/04

9.1%

0.11

2010/11

8.6%

0.94

2011/12

6.7% proj.

0.85

Crop Year Cash prices in Southern Minnesota
1993/94 Peaked in January, slowly fading through spring with another peak in June
1995/96 Peaked in the first half of July – our first experience with $5 corn
1996/97 Prices held high and strong through the months of March and April
2003/04 Peaked in the first half of April and continued to hold at good levels through early June
2010/11 Cash prices peaked in the first half of June, with a repeat in late August
2011/12 ?

* September 1 – August 31

** Estimates per USDA World Agricultural Supply & Demand Estimates (WASDE).

*** This is the approximate mid-month premium for the old crop July contract over the new crop December contract. CBOT corn futures data from the CBOT.

Here’s the question concerning the similar years: When did cash corn prices peak? The answer is not March. Based on similar years since 1990, I look for corn prices to remain strong through the end of May or later.

We can’t help but the carry the question one step further and ask, What about prices this summer? That depends, of course, on the weather. If we can break the dry spell and return to a weather pattern that makes the corn belt, well, the Corn Belt, I expect prices to turn lower (possibly sharply lower) by harvest. If dryness persists, strap in for a ride because all bets are off.


Responses

  1. Say corn gets the expected acres and we have a decent growing season to produce a big crop – corn futures still will not move sharply lower if soybean futures are elevated due to tight supplies in the new crop outlook. Corn isn’t on an island by itself – people have lost this focus, not giving price relationships any notice…


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