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History suggests corn price could hit $11 a bushel
Are corn prices on their way to $11 a bushel?
It looks that way, comparing Chicago futures prices this time round with those 15 years ago when stocks last got this tight.
The similarity in the move in corn prices is startling, says Travis Carter, a consultant at US broker FCStone.
"The big moves have happened to the day when comparing the two years," he said - right down to yesterday's weakness in prices.
History repeats itself
Indeed, overlaying the corn price graphs for the performance of March 1996 and March 2011, adjusted such that around $3 a bushel then equates to a little over $4.50 a bushel today, shows identical twins from mid-August onwards.
Both charts match on September, October and December rallies, with some weakness in November.
Assuming the trend continues, the chart implies this year's March lot hitting $7.50 a bushel before it expires, to keep pace with the little over $4 a bushel that Chicago's March 1996 contract achieved.
And even these figures are small beer compared with the peak that comparison of July lots implies.
In 1996, this contract topped $5.50 a bushel shortly before it expired, equivalent to nearly $11 when transposed to the graph for the July 2011 lot.
Tight supplies
Some parallels between the two years are not surprising, given their similar dynamics, with the US stocks-to-use ratio for 1995-96 at 5.0%, lower even than the 6% or so expected this season, the thinnest since for corn supplies, Mr Carter said.
The stocks-to-use ratio is a key indicator of a crop's availability, and therefore the prices it can command.
"Just like this year, people all summer expected a big crop which just wasn't there when it came to harvest," Mr Carter told Agrimoney.com.
Reasons for caution
However, he urged caution over extrapolating the comparison too far, for two reasons.
The first is that 1996 prices were also helped by a hefty January cut of 18% in the US Department of Agriculture's estimate for American inventories at the end of the crop year, as well as by a bullish report in March on farmers' planting intentions.
And even if similar revisions this year are not out of the question, it is to be hoped that a second thrust to 1996 prices – the so-called hedge-to-arrive debacle – is.
This scandal - which brought many farm enterprises to their knees, and is still splitting some farm communities to this day, Market 1 analyst Mike Mawdsley told Agrimoney.com – sought to exploit a rare backwardation in corn futures, when near-term lots are worth more than those further ahead.
However, market moves meant the co-operatives and growers who had piled into near-term lots in the hope of making a profit from rolling into later contracts were left high and dry.
"I know of a church where those that were invested in this still sit on the other side of the aisle to those that did not," Mr Mawdsley said.
"We sure do not want anything like hedge-to-arrive back again."
