27, 2007 -- No matter how bullish or bearish a market appears to be, there is always another view. The other view can be that of a contrarian that feels a change in trend is in order because everyone is too one sided. Or, the view can be that of a fundamentalist believing with deep felt conviction that the current supply-demand situation no longer justifies current values. It takes two opinions in other words, to make a market. And there is always two opinions.
In late September, nearby corn futures expired at $2.23 a bushel but now, summer futures are $2 a bushel higher. Ending supplies are exceptionally tight and fear is rampant that U.S. farmers will not plant enough corn in the '07 season to meet demand. In less than 100 days, the corn market has gone from being historically bearish to historically bullish.
Today, the consensus regarding the out look for corn is that prices have risen to ration existing supplies and "buy" acres for not just this year but for years to come. Corn prices have nowhere to go but up is a view held widely. But as I said, There is always another view, another opinion. A Japanese grain analyst with a Japanese brokerage firm that will go unnamed, forecast about a week ago, that U.S. corn prices could, under the right circumstance, hit $5 a bushel in the first quarter of this year and $6 a bushel by the summer. A grain analyst with a U.S. analytical firm that will go unnamed, argued that under the right set of circumstances corn prices could drop down to $3 a bushel by the end of '07.
Which analyst will be proven right? I guess it depends on the circumstances! The Japanese analyst is looking at the corn market and making the following assumptions; ending stocks are so tight that prices must rise to ration supplies; prices could rise even further if the spring weather is wet, forcing farmers to plant less corn; prices will rise again if July, is exceptionally hot and dry; prices could accelerate to the upside even more violently if an early frost or a wet harvest take place.
The U.S. analyst is watching the corn market and taking the opposite view. He is assuming that prices are now attractive enough that farmers will eagerly seed a historic amount of acreage to corn this spring that will rebuild stocks to a billion bushels or more. If so, even Mother Nature cannot give enough support to prices to allow the market to hit $5 to $6 a bushel. Thus, prices will soon peak and put off for another year any hopes of seeing and sustaining all time historic highs for corn values.
In my view, "under the right set of circumstances" both analysts could be right. For example, let's assume that U.S. farmers do indeed plant 10 million or more acres for corn this year compared to last. But in the summer, after planting is complete and acreage totals known, Mother Nature blasts the Midwest with unusually hot and dry weather in July, when a corn crop is made or broken. With summer corn futures now trading at $4.25 or so, a $1 a bushel rally would be no big deal.
If the crop were to escape serious damage thanks to genetically improved seed and with 10 million more acres than last year and with corn futures well over $5 a bushel, the downside could be easily be $1.50 to $2 a bushel. That would mean the Japanese anayst would be correct with a forecast of $5 plus corn and so would the U.S. analyst with an outlook for $3 corn. That is assuming of course, everything took place, "under the right set of circumstances."
There are also differing views on what will happen now that February is at hand. Historically, February is the most bearish month of the year for the grain complex. That is how it was from 1972 to 2000. The seasonal weakness was so well known and anticipated it was given the name, The February Break.
The rule of thumb for 30 years was to exit long positions as prices always weakened in February.
On the other hand, since '00, the tendency is for grain prices to bottom in early February and rally into March. In some years, the rise with soybean prices in February was just shy of $2 a bushel. There is now an exceptionally strong tendency for grain prices to post stiff gains in the second month of the year.
What will be seen this February, you ask? Stay tuned!
Call me at 406-682-5010 if I can be of help.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)