THE U.S. Department of Agriculture's May "World Agricultural Supply & Demand Estimates" report was not what the bulls had hoped for in corn.
While USDA lowered this year's (2013-14) corn carryout more than most analysts had expected — pegging the carryout at 1.146 billion bu. — the increase in new-crop carryover far overshadowed the old crop.
With an estimated corn carryover at 1.726 billion bu., this was just what the bears needed to confirm a spring top.
Bull or bear spread?
With these big shifts in both old- and new-crop numbers, many traders jumped to the assumption that this will be a market for a bull spread (long July/short December).
I doubt that is going to be the case. Why? Because 1.1 billion bu. of corn is still a large carryover compared to last year's 821 million.
There is not going to be any squeeze on old-crop corn late in the marketing season. In fact, producers, particularly in the northern Corn Belt, will be scrambling all over themselves to empty their grain bins.
As long as decent production weather occurs, bear spreading may well be more attractive than bull spreading in this market. Additionally, even if weather problems do occur during July, it will be more supportive to the new crop than to the old crop.
The Figure shows the long-term cycle in corn prices going back to 1905. It is very dominant. The longest peak-to-peak cycle was 31 years, from 1917 to 1948, and the last peak-to-peak cycle top was from 1996 to 2012. The cycle still exists; it is just getting shorter.
More important is the peak-to-trough cycle. The last one lasted nine years, bottoming in 2005. Assuming that this cycle continues to shorten, it would not be at all surprising to see the next cycle low in corn somewhere between 2018 and 2021.
The price level is only a guess at this stage of the game, but settling back to what the resistance area had been in the 1980s would likely provide support as the corn market falls. That price is roughly $3.50/bu.
How can this happen?
It would be quite simple for this to happen, actually. USDA is using a trend-line corn yield of 165 bu. per acre. With today's crop genetics, good growing conditions could push that number into the high 170s.
The planting pace for the majority of the Corn Belt is at or better than the five-year average. Thus, the only thing that could curtail a long-term bear market would be a July drought.
Those in this business who have been at it for 10 years or less are too young to remember how bottoms are made in the corn market. When the stocks-to-usage ratio gets above 12%, it can sometimes take years to dig out of the huge supply.
The two old sayings that have always worked are: "The cure for high prices is high prices," and, "The cure for low prices is low prices."
Demand can be damaged in the short term, but it takes a long time to rebuild demand.
The ethanol industry is mature. Livestock demand is not growing. Export demand has rebounded back to levels where it was three years ago.
This is now an altogether different trading environment than what we experienced during 2010-12.
As I pointed out last month (Feedstuffs, April 21), this is a market that has all of the ingredients for setting its annual lows in the July/August time frame. Basis levels will be wide, and merchandizing opportunities should be very good.
*Richard A. Brock, president of Brock Associates, has been publishing "The Brock Report" for more than 30 years. He leads the Brock Associates team and is responsible for the development of marketing strategies. Brock also serves as a commodity marketing adviser and price forecaster to many of the nation's largest agribusiness firms, food companies and financial institutions. He can be reached at [email protected]