FBA Issue 23: November / December 2008
Corn gone wild: High strangeness in CBOT markets
The real story in this year's grain markets is CBOT corn's strange price volatility - veering upwards 50 percent for a five week spell, then down by over a quarter in just four weeks. This was preceded by a previous price peak and sudden retreat earlier in the year. Before this wild ride from approximately $3.50/bushel in late 2007 to near $7.85/bushel in mid 2008 and crash close to $5/bushel just five weeks later, corn was a stable feed grain. CBOT corn quietly treaded in the $2/bushel to $3/bushel range for many years.
Strange disconnect between prices & fundamentals
Granted, everyone knows that corn's supply-demand balance is the tightest of all major feed grains. Yet, those huge price increases were not due to a plague wiping out a huge portion of the global corn crop. Similarly, sharp falls that followed July's new price record were not triggered by large harvests or the expectation of higher crop yields.
Hence, in the absence of any large swings in market fundamentals, corn prices are behaving like a strange roller coaster that defies both gravity and solid earth. In this paper, we seek to explain corn's strange, market defying price behaviour and project, within limitations, its implications for the future.
A review of the price curve, so far
Corn prices have shown considerable volatility over this past year. Starting from a fourth quarter 2007 price of $3.50/bushel, rallying corn entered 2008 near $4.60/bushel and touched $5.60/bushel in March when commodity prices cooled down for a while after the Bear Stearns fiasco. America's Fed stopped printing buckets of money and as oil and soya beans retreated from their early year price records, and so too did corn.
Then, after some late spring slackness, unfavourably wet US corn growing pushed it to new records around $6.00/bushel in April and May. June followed with catastrophic floods in the mid-west put a new spark in corn prices.
Interestingly, with everyone distracted by Iowa's floodwaters, nobody was looking at the oil market. Coinciding with US Midwest floods was oil's rally to a record $147/barrel, which, along with the above factors, pulled corn to $7.99/bushel by mid-year.
Yet, no sooner was the record set that analysts were concurring that early USDA estimates of flood damage to this year's crop were overly bearish. A combination of successful replanting and higher than expected crop yields have lifted American corn harvest estimates significantly above their post flood lows in early July. Corn then suffered a massive price correction of more than 25 percent in just one month.
Yet, that was only the beginning of CBOT corn's price volatility. In the analysis that follows, we see how September and October's wild market swings could only imply market fundamentals if we kept swinging from bountiful harvests to famine and back several times every growing season.
Clearly, with biofuel's acting as an arbitrage agent, corn's links to energy markets and monetary policy were manifesting the drastic, repeated reversals of economic policy being made in this year's financially turbulent environment.
Global corn supply depends on a tiny export base
To get a better perspective, let us see if market fundamentals justify such wild price swings. America functions as the 800 pound gorilla of the world corn market, as it accounts for 60 to 70 percent of corn exports in any given year.
US corn production was 267.6 million tonnes in 2006 and jumped a handsome 24 percent to 332.1 million tonnes in 2007 - with virtually all of the increase eaten up by ethanol fermentation. Yet, global corn demand keeps growing and this makes for a tightening supply-demand balance.
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