While the bulls have called this the “perfect storm” for quite some time, this is far from a perfect storm for the livestock industry or anyone else buying corn, soybeans or wheat.
In an environment where the fundamentals were already quite bullish for corn, what the market did not need was severe weather problems this spring and summer.
While several leading climatologists were predicting droughts for this year, that has been far from the case. The upper Midwest has been pounded with rain, the corn and soybean crop was planted late and is severely behind in over 90 percent of the Corn Belt.
Granted, warm weather in July could turn this crop around quickly, but almost all the experts would agree that it will be nearly impossible now for either corn or soybeans to come close to trendline yields.
What everyone wants to know at this stage, of course, is — how high will corn and soybeans prices go? To be honest, no one knows the answer to that.
If you look at past weather markets, the majority of tops have occurred in the last week of June or the first week of July. The Fourth of July seems to be fireworks for more than just celebration. By then the majority of the bullish news will be known and will likely be factored into the market.
That could be $8 corn and $16 soybeans. Technically, it is fairly easy to come up with an objective in December corn of $8.20 and November soybeans at $16.35.
In the June crop report, the USDA pegged this year's corn yield at 148.9 bushels per acre compared to trendline yield of 156. That would result in a carryover supply in the 2008-09 crop year of only 673 million bushels. While bullish, in the long-term even that will not likely support $7.50 corn.
While corn and soybean producers who have good crops this year are enjoying this bull ride, let's not lose a long-term perspective. This bull market is devastating to the pork, poultry and beef industry. If grain prices are to stay this high much longer, liquidation in all three could result in long-term weak demand for corn.
Ethanol has been good for corn producers — but the livestock industry has been better and will be for the long-term.
The grain industry and U.S. consumers as a whole cannot afford the long-term impact of the financial devastation currently taking place in the livestock industry. It is now a question for many producers in livestock to just see how long they can hold on.
For the last two years the grain market has been a demand-driven bull market. Because of weather problems, the short-term influence on this market is now supply. Supply-driven bull markets peak early and have a long tail.
Supply-driven problems are easy to see and are built in to market prices quickly. As a result, be careful about being overwhelmed in the current bull market. This one will likely be over fairly quickly, albeit at higher prices that we are currently seeing.
Big bulls also lead to big bears. Prepare yourself for a wild ride.