Is this bull market like the 70's?
The bull market is alive and well, with new highs early this week and last Friday in 2007 July wheat, Dec07 corn, and Nov07 soybeans. The dry weather last week in winter wheat country sparked the wheat market higher on drought concerns. Not to be outdone, corn and soybeans rallied as they do not want to lose acreage to wheat in the coming year.
The acreage battle for 2007 is heating up already in November, which makes one wonder just how intense its going to be next March! After a big push early this week, markets softened midweek (as they have done during most of this recent run higher).
The overwhelming feeling in the market is the realization that 2007 acreage for corn may not be achievable to keep all demand fed, even with historically large shifts away from soybeans (and possibly spring wheat). This problem is caused by the increasingly large demand needed to feed the ethanol boom, which will go from 16% of the US corn crop in 2005 to 28% in 2007 and likely 34% in 2008.
This is a large demand shock for the market to endure from 'fuel' in a short time, a new source of demand for the corn market (not food or feed). The food and feed demand remains the same (or higher with tight world/US current stocks). So, it is a problem which the market may have difficulty dealing with. Our own USDA Chief Economist equates this demand shock to the Russian grain buying of the early 1970's-a tremendous period of prosperity for agriculture.
If one looks closely at the price picture that emerged in the 70's, one has a greater respect for the move the market could make in the coming year. During those first few years of 1972-1973, wheat prices almost doubled their previous price ranges (from $2.50 to near $5), pushed back under harvest pressure nearly to the old historic price highs ($2.75-$3), and then promptly doubled them again a few months after harvest ($5). An equivalent move today would be corn moving from its high this fall of $3.50, to a price near double that by next spring ($7!).
While it seems impossible, since it has happened before, we have to respect the ability of the market to do it again, however much a longshot it is. If our Chief Economist, Dr. Keith Collins talks about the similarities (he's never done this before), then one has to at least consider the possibility of a historical price rally this coming winter.
Maybe one has to imagine for a minute what a rally like that would look like by November of the year. Perhaps one would expect an unexpectedly large rally during the fall. It's likely that some other commodities (say crude oil or metals???) would have made some unprecedented market rallies as well in the year prior to the grain rally (this also occurred in the early 70's). Funds might be emboldened by seeing these other commodities double in value in a short period of time, and be more willing to buy grains as well at historically high levels. Maybe the US dollar will have flashed some signs of weakness as well (like a 20% or more drop in the previous year).