All-time highs for wheat, corn next?
Wheat prices accelerated upward this week pushing into all time new contract highs, as the market continues to grapple with tightening world inventories due to second consecutive mediocre world crop.
In 1996, the previous high for wheat prices, corn futures were also on the offensive moving to $5.54 on July futures. Is corn now in a position to follow wheat prices upward?
Probably not, at least not right away. In 2007, it looks as though the 20% increase in corn acreage, as well as what appears to be a crop that will yield somewhere near 150 bushels an acre give or take 3 to 5 bushels either side of this figure. This should be enough inventory to prevent a near-term rally. However, when viewing the bigger picture, with ethanol demand growing yearly, excess inventory of corn will continue to remain precariously tight, not only in the United States but throughout the world.
Other factors affecting the corn supply in the years to come, especially in 2008, is the reality that current corn futures are not offering enough incentive for farmers to stick with a strong corn rotation. In fact, one can argue the contrary.
Both wheat and beans are not only priced high enough to encourage farmers to switch more to a rotation, but farmers themselves have voiced concern that they would like to get back into more of a rotational pattern. In the winter of 2007, corn prices rallied significantly enough that it was nearly impossible for farmers not to entertain the prospect of increasing corn acreage. That has changed. Unless corn futures provide a strong enough financial incentive, and that would likely be a futures rally to $4.50 to $5 on December 2008, corn acreage will be down in the year ahead.
China, the number two corn producer in the world, continues to exhibit a long slide of declining carryout. World coarse grain stocks are at uncomfortably tight levels, and the corn market, despite what type of crop the U.S. produces this year, will be facing a very precarious supply situation next year.
The key will be weather. It appears that with increased technology, better genetics, tillage practices and better farmers, it is difficult to grow a poor crop. However, that line of thinking is likely flawed and could lead to a perfect storm of financial disaster for end users. Obviously, it seems that the United States has a unique ability to continue to plant and grow significant crops one after another, but one would be naÃ¯ve to believe that there is not a poor crop year lurking somewhere in the future. If a poor crop occurs in the next year or two, corn prices will see a dramatic increase and probably reach all-time new high levels and then some.
Therefore, while it is difficult to predict price movement, one can step back and look at the bigger picture. Corn prices wallowed at exceptionally low prices in the first five years of the new millennium. The demand side of the coin was rapidly taking advantage to the point where it now may just be a matter of time before the steam blows the lid off of the corn market. It appears the 2007 crop escaped some serious weather issues as a whole, pushing prices lower into mid-summer, which in the long run, continues to aid a growing demand market. Eventually prices will push higher. It is just a matter of time.