TURNING POINT After dropping close to 40 cents, corn prices rallied into the 4th of July on concerns of dry conditions in the West, and that warm and dry weather in July could be a turning point for this year's crop. Only time will tell. However, in the bigger picture, it is likely that 2006 will be a turning point for the corn market from a historical perspective.
For the first time in recent history, and perhaps ever, corn demand may out-strip supply. In most years, U.S. farmers have managed to produce more corn than what was needed. Thus, a build-up of carryout has existed in most years, which has kept corn in a prolonged sideways price pattern.
In the past, there were three major variables that affected corn prices. First was production. Weather dominates the production picture, so as weather goes, production goes. The Midwest is known as the "Bread Basket" to the world for a reason. Generally, weather is good enough in most years to produce an average to above-average crop and thus, keep in place a long-term uptrending yield as well as an adequate carry-over. Changes in acres have remained minimal with numbers relatively flat in a range of 75 to 80 million acres.
The second variable affecting prices, historically, has been feed usage. While this number has consistently increased over the years, it is a relatively known quantity and moderately predictable. In the years ahead, due to higher livestock prices and decent profits, we expect feed usage to remain strong.
The other variable that has somewhat affected price historically is exports. However, exports have been relatively range-bound as well, near two billion bushels annually. In summary, history has really seen corn price dictated by weather with relatively stable feed usage and export figures.
The new variables that affect corn are ethanol and speculative fund money. These two variables help to constitute a much more volatile price picture. For 2006, we believe the market was mostly surprised by the uptrend in corn prices during the winter months when carryout was at 10-year high levels. However, with the continued upward projected use of ethanol, the need for large corn crops has increased significantly. The investment community has also noticed this and, in part, explains why there is currently a significant influx of speculative money in the corn market.
While there are no "sure things", it certainly is probable and logical that corn price volatility will increase in the years ahead. There's not much room for a poor crop or, for that matter, even the perception of a poor crop. Volatility brings opportunity. Feed users should be aggressive when corn prices drop. On the flip side, producers should not panic into selling if prices have made a big drop, except late summer if it looks like a large crop is almost assured and there is more than 30 or 40 cents downside risk. Otherwise, be patient. Rallies are likely, and you will be in a much stronger financial position to be a seller on an up-move.