$1 rally in corn?
Corn rallied $1 from its lows just over a week ago, with March trading above $4 again today. So much for limited volatility! While sellers were having their way with the market 2 weeks ago, now buyers might have the upper hand as markets have rallied significantly. So what changed in the last 2 weeks?
One major factor is the dollar value, which has dropped about 7% in the past 2 weeks. The dollar drop makes all commodities cheaper to importers, and thus helps to add value to commodity values. The past few months prior to this the US dollar rallied sharply from about 70 on the index to almost 90. The drop to 80 took very little time, and now the trend for the dollar seems to be down. That could have huge implications for the trend of grain values going forward in 2009.
The US economy also seems to have stabilized somewhat after weeks of unpleasant news out of banks, stocks, and traded major companies. There hasn't been any more rumors of companies failing lately, and even the Detroit carmakers might find a way to survive the next few months. While layoffs have occurred, the stability in the stock market above 8500 recently is encouraging, actually rallying above the previous 7500-8500 range. While the economy is still precarious, as least now it is stable.
The FED has also indicated a willingness to do whatever it takes to keep financial market/commodities at decent values - and avoid depreciation of asset values. This week they dropped the Fed Funds rate to the lowest ever at 0.25%, with many banks following these numbers down. There is very little return from keeping money at banks, but people are so worried about the economic outlook they are willing to accept almost no return rather than risk their money in stocks, commodities, or other risky assets. While deposits are high, there still is very little borrowing from banks to the public. Part of the problem might be that many banks are not following interest rates down, as already depositors are getting very little return for keeping their money in banks. So they keep their interest rates at 4-4.5% regardless of what the FED does! This could make the more recent cuts to near zero percent interest not as effective as a 0.75% cut normally would. In time we shall see!
Finally, while demand destruction has been the talk of the commodity markets the past few months, now supply destruction is becoming a vogue concept. After all, prices declined so quickly that producers are wondering how they are going to pay for any new production (whether it be grains, oil, energy, or any basic commodity). South America is unlikely to expand production much now that planting is over, and so far surveys of North American producers show little interest in increased production. Could that pull stocks levels back to uncomfortably tight levels?
Already corn prices have rallied such that the soybean/corn price ratio has dropped below 2.0 for 2009 crops. That favors corn on the sale side traditionally, but look where many input suppliers are leaving input costs (like potash fertilizer). It makes it difficult to produce corn at a loss due to inflated fertilizer/input costs, so you can't hardly blame the producer for noticing!