At an early August Strategies for Success seminar in southwest Minnesota, a farmer from North Dakota came up to me before the meeting started and said, "I have two questions, and I hope you can answer them both. First, what caused grain prices to fall so far? And second, have prices finally bottomed?"
I said that I would be glad to answer his questions, and I also offered to answer one he had not thought of: When will prices come back?
Prices went too high. The last $1.00-per-bushel rally in December 2008 corn futures had price trading up to $7.99 per bushel. At that high price, futures were trading over $1.00 per bushel higher than ethanol manufacturers or livestock feeders could afford to pay. When you get prices way above value, it is just a matter of time until usage slows down and prices move back to a fair value.
Weather conditions improved, and U.S. crop yield potential increased dramatically from mid-June to early August.
Crude oil and commodity prices were soaring higher as the flood of Wall Street money kept buying into the commodity markets. Corn and other grain markets had been pulled higher by the crude oil market. So when energy prices turned sharply lower, corn prices went down as index traders reduced the amount of money they had in commodity-based investments.
The U.S. dollar, which had been collapsing lower, suddenly turned higher in early August. The 3% rally was another reason for global commodity investors to exit long futures positions.
When you have record-high prices, it sets up the potential for record price corrections. The normal seasonal pattern in corn is for price to fall by 20% to 22% from the May-June high to the July-October low. When corn tops out at $3.00 per bushel, a normal 20% correction will take prices down 60 cents per bushel.
It is amazing to realize that corn futures fell further in two months this summer than corn was worth two years ago. This is a larger-than-normal price correction, which can occur when prices turn lower from such an extremely high price level. With increased global food demand and record-high open interest levels in the agricultural commodity markets, keep your seat belt on. This will remain a very volatile grain market. The fundamental factors that I mentioned above explain why prices moved lower; they do not mean prices are going to stay lower.
The 40% price correction in corn futures projects a low in the August-to-October time frame. This could also mean a major seasonal low in the corn and soybean markets. With ideal weather and a frostfree October to December, corn could drop all the way back to a $4.80 harvest low. The soybean market also fell about 40% in the last two months. With ideal fall weather, it is possible that November futures could set back all the way to the $10.00 price level.
Commodity funds took a beating in the corn and soybean futures markets this summer as they learned that markets go down twice as fast as prices move higher and prices do not go up forever. The current fund position is the lowest since the fall of 2007.