Prepared by Richard A. Brock & Associates, Inc.
To state that a wild ride is ahead in corn prices will likely turn out to be the understatement of the year. What is going to make this market increasingly difficult is the fact that it is a demand-driven bull market, which is always much more difficult to quantify. That is particularly true since we're trading in a worldwide market, and some of the old rules for market analysis may no longer apply. Sharp price rises in the last month have led many of the bears to believe that the current bullish fundamentals are discounted in the market.They may be right. On the other hand, the bulls have enough ammunition to keep going for quite some time. Let's look further.
What's changed in the bulls' favor in the last month is that there has been a continued drop in world corn and feed grain production, specifically in China, and yet a continued increase in world wide usage. As we can see on both the table for world corn supply and demand and the chart indicating world coarse grain ending stocks supplies are very tight. More specifically:
1. The corn stocks-to-usage ratio worldwide this year will be the lowest in history at 10.8%.
2. Unless planted acreage and yields pick up dramatically worldwide this year, the stocks-to-usage ratio will likely decline again next year.
3. The world coarse grains stocks-to-usage ratio is also the lowest in history.
*USDA Estimate
**Brock Estimate
The Bottom Line: This market is currently trading in uncharted waters. Price elasticity with worldwide markets combined with these tight supplies has never before been tested. It assures that prices swings are going to be dramatic over the next few months.
In looking at the bulls' argument, one might ask “How could this market possibly go down with such tight fundamentals?” The answer is really quite simple. The laws of economics have not been repealed and even though the fundamentals point strongly in favor of the bulls' case, the real question is at what point will supplies be rationed. In other words, what do we really have a shortage of? $2.50 corn? $3.00 corn? Or $3.50 corn? It's a fact that we will not run out of corn. The issue is at what price level will supplies be rationed.
Domestically, the USDA estimates, as well as our own estimates pegged this year's stocks-to-usage ratio at 8.3%. That compares to the 1996/97 stocks-to-usage ratio of 10.7% and the 1995/96 ratio of 4.6% when prices averaged $3.24 per bushel. With this year's ratio at 8.3%, the mid-point of the USDA's price range is $2.75. The top end of the range is $2.95.
If you assume a national average basis of approximately 15 cents under the nearby futures, December corn trading at $2.90 equates to $2.75 which is “average.” However, since the marketing year began on September 1, corn prices have been trading under that level. Therefore, even if prices were to average $2.75 this year, one could easily assume that there is at least another 15 to 25 cents per bushel left on the upside with the current move.
Also on the bear side is the fact that high prices now will likely result in more planted corn acres this coming spring in the United States than most analysts are currently expecting. Many farmers make their planting decisions between now and January 1, since a lot of chemicals and seed will be purchased prior to the end of this year. High prices now will encourage a shift from soybeans into corn.
There is no question the major trend in the corn market is currently up. Simple technical analysis gives two reasonable upside objectives. The first of which is $3.14 basis March corn futures. This is calculated by taking the center of the flag that was established during the month of September and adding to the center of that price the distance between the flag and the bottom of the market that was established on July 7.
The next possible upside objective is calculated by assuming that the flag generated over the last two weeks is 50% of the move from the low established in the last week of September. The center of the flag is $2.97 and the lows in the last week of September is $2.64. Add the difference of 33 cents back on to $2.97 and the objective becomes $3.30.
With the fundamentals as bullish as they are and next year's corn not yet planted, significant price breaks will be met with heavy commercial buying over the next few weeks. The top of this market is not likely in yet and price swings both up and down are going to be dramatic. Buyers should use weakness in the March corn between $2.80 and $2.90 to increase purchases for the first quarter of 1998.
The most important aspect to recognize in this market, however, is that the top will likely be established before mid-January. Bull markets this time of year normally result in bear markets of significant magnitude starting prior to the spring of the next year. While 1998 could well turn out to be the year for the bears, but the bulls have not stopped dancing yet.
October 24, 1997
Richard A. Brock & Associates, Inc.
2050 W. Good Hope Road, Milwaukee, Wisconsin
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