Could corn be the first to lead world commodity prices out of the trenches? There are several factors affirming that possibility, according to Bill Biedermann, senior vice president, Allendale Inc., a commodity brokerage firm.
Biedermann pointed out that historically, the grain markets have rallied when the economy is in recession. The reason is simple. “Governments reduce interest rates to stimulate economic activity. Deflating costs of fuel, food, heating costs, mortgages, fertilizer and chemicals begin to work into the pockets of consumers.
“This gives 100 percent of the population added discretionary income which more than offsets the 1 or 2 percent increase in unemployment. Now speculators and end-users have more money to invest in a fundamentally bullish market.”
And corn does have some very bullish fundamentals. Combine this with the government economic policies and the tight world stocks situation, “and there is an explosive situation.”
Biedermann adds that funds, large speculator pools with large amounts of investment capital, have had a major bearish influence on the grain markets, creating extreme price swings that aren't good for producers and consumers.
“For example, $1.80 corn is too cheap and costs taxpayers billions in farm payments and producers dearly in profits. On the other hand, $5 corn is too expensive and hurts consumers. Once demand is hurt, it can take years of cheap prices to buy the lost demand back.”
Biedermann believes that the funds could be trading and influencing the price next year — maybe to the upside.
Farm policy also influences prices, notes Biedermann. “When a producer is making an acreage decision based on which USDA crop program will minimize losses better, rather than looking at the profit that can be made by selling the crop in the open market, then something is wrong with ag policy.”
Biedermann believes that farm policy is too greatly influenced by large grain concerns wanting more export share than by the basics of sound farm policy designed to generate fair market value.
Biedermann also points out that the last time world corn stocks were this low — 126 million metric tons — was 1995, when only 124 million metric tons were in reserve. Eventually prices rallied to $3.60 and over $5 during that time.
The trade status of major corn exporters also favors the United States, according to Biedermann. He noted that China recently became an importer this year, just as it did in 1995. “China bought nearly 1 million metric tons from the United States recently and is now forecasting they will need to import 2 million metric tons before the year's end. In addition Argentina, the world's second-largest exporter of corn at 10 million to 12 million tons per year, will only be able to export about 7.5 million tons due to reduced acreage and production.”
Another major exporter, South Africa, will need to import 300,000 tons of corn in order to meet demand.
In sum, “The major exporters of corn have switched to importing status, a huge shift in world fundamentals.”
In addition to export potential, a significant increase in ethanol and industrial use for U.S. corn is forecast. Ethanol production could top 700 million bushels in 2001-02 versus 627 million in 2000. Usage in 2002 is projected to hit 825 million bushels, according to Biedermann.
Biedermann believes the situation could get even more bullish in 2002. “With low beginning stocks and current demand exceeding estimated production, world stocks could slip to a new record low of 108 million metric tons in 2002, assuming major producers have trend yields.
“Simply put, the supply situation for corn is so tight that if there is a slightly reduced crop anywhere in the world in the coming 12 months, it's realistic to say there will not be enough corn in the world pipeline to sufficiently meet demand. Some country would have to reduce usage.”
What does all this mean for prices?
“Economic models are projecting old crop corn to trade in the $2.50 to $2.60 price range. Technical patterns would support such a move provided there is a breakout above $2.45 resistance. New crop corn projects to $2.65 to $2.80.
“Much higher prices are possible if any world crop is adversely affected by weather,” he adds. He advises producers to hold corn until sales can be made between $2.35 and $2.60. “Sell 25 percent of new crop at $2.60 and additional amounts every nine cents higher as long as call options are used to manage the upside.”