I have been driving and farming for over 30 years, and for the first time ever I am hoping for higher crude oil and gasoline prices. I don't like the thought of paying more for my fuel, but if last year's pattern continues, I can see that it will take higher crude oil and gasoline prices to get the corn market to rally. The Corn vs. Crude Oil Prices chart shows that since early last year corn prices have moved up and then down with the crude oil market.
A review of the market action in 2008 shows corn and crude oil rallying sharply higher with both contracts making new all-time highs in the spring of 2008. Eventually crude oil and corn prices put in a major high in late June of 2008. The December 2009 Corn Futures Contract peaked at $7.07 within a week of when crude oil topped out at $147 per barrel.
These three factors were responsible for the rally last year.
- The huge amount of buying from hedge and index funds as Wall Street investor's poured money into the energy and corn futures markets.
- The hard down move in the U.S. dollar that had investors getting out of the equity markets and going into hard assets (like corn and crude oil).
- The wet spring and tough crop conditions in the Midwest that threatened corn yield prospects in the central Corn Belt. Looking ahead, there are some factors that I will watch to signal that crude oil and corn prices have bottomed and will move higher. The drop from $147 in June to less than $ 38.00 per barrel in December of 2008 had prices dropping lower than my early projections for a low of $60 per barrel in the third quarter of 2008. The three positive factors listed previously all turned negative as funds liquidated their huge long positions in the crude and corn markets, the dollar rallied, and crop conditions showed a huge improvement by late summer.
When I try to sort out the new global grain fundamentals in the current financial environment, there are two longer-term factors that I monitor. First is that even though growth has slowed in China, they still show a positive growth rate. We see large numbers of rural farmers moving to the major cities getting paychecks and becoming global consumers of higher protein diets.
Second is that a lot of the global consumers who buy feed grains and meat from the U.S. are also buying energy. Now that their gasoline and home heating bills are lower, they have more money left in the budget to buy food. This global energy saving is helping rebuild food and feed demand that was lost last summer when corn futures peaked at over $8.00 per bushel and crude oil peaked at $147 per barrel.
I look at the U.S. corn 2009 supply/demand scenarios using the smaller corn acreage forecasts that several firms are now projecting. It sets up a volatile corn market in 2009.
When I look at the different yield projections of 154 to 158 bushels per acre, ending stocks stay at record low levels. This cannot happen. I can see the grain trader's attention switching from problems on Wall Street to the corn-soybean acreage battle that will unfold over the next 30 to 90 days.