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Corn Markets...A Vicious Cycle

Published on Monday, February 6, 2017

This time of year, there are a lot of conversations about fundamental elements such as those discussed last week.  As it is, it is easy to get caught in conversations about weather (here and elsewhere), acreage, profitability, etc.  While all of those discussions have merit and are worthy of staying informed about, they are only part of the equation.  Commodity markets also have a tendency to work into technical patterns (chart formations) that have a degree of seasonality and cyclical nature to them.

Last year we discussed the cycle of how "Short Crops" have a "Long Tail".  In that discussion, we identified that history suggested that a new low would be made approximately 4 years following the 2012 drought peak (see chart). In March of last year, spot corn prices moved to a low of $3.47/bu.  Based on the drought conversation that was stirring at the time, many thought that the low would not be discovered and only higher prices remained in our near future. The market had something else in mind.  Following its peak in June, prices cascaded lower to violate the December 2014 Corn Futures low of $3.18 by taking the spot market to $3.01 and December 2016 futures to a low of $3.1475/bushel. The cycle was complete.

The question that remains in the mind of many is what to expect in the wake of that low.  Do we launch back toward old highs?  Do we move back towards a price that is "fair" for everyone?  The reality is that we often get caught in a range.  That said, take a look at the preceding short crop long tail phenomenon from 1996 and what followed it (see chart below).  Two years of consolidated, range bound trade followed that low.  Look familiar?

We have offered some ranges to follow in the past.  See Monthly Corn Chart Below.  We have become incredibly comfortable trading the $3.00 to $4.50 range over the last few years.  While it is not a big step out on a limb, we would suggest that more of that same activity could frame up the conversation throughout 2017.  With that in mind, we have a big picture view of risk and opportunity for the year.  Buyers are encouraged to find value at the low end of that range.  Sellers are encouraged to find value at the top end of the range

So let's narrow this conversation down even further to look at new crop corn (December 2017).  When looking at the last couple of years, another price pattern reveals itself.  The range from $3.75 to $3.95 carries a great deal of significance as the market seeks balance through the winter months. See Charts below comparing December 2016 corn at this same time last year to the current Dec 2017 market.

Since there is no crystal ball for our future, understanding some of the patterns of our past helps to properly frame expectations until those are better shaped by current information.  Given the ongoing nature of our current cycle, we suggest that buyers and sellers position themselves accordingly as markets move within the existing range.  Since the new crop market is parked almost perfectly in the middle of our historical $3.00-$4.50 range, we must be mindful of our current range as it relates to the bigger picture. While buyers might be afforded some degree of added patience, sellers should be acting sooner than later.  Regardless of which camp you are in, now is a good time to formulate a plan of action.  To identify strategies that best suit your situation, give us a call.

608-960-4771.