Corn stocks are tight and it shows in two different ways; an inverted futures market and a strong basis. What does this suggest for cash corn price direction into the spring?
Corn futures prices are showing a strong inverse (nearby prices higher than deferred prices) from old to new crop. Since January, the July 2012 corn contract has traded at a 50- to 80-cent premium to the December 2012 (new crop) contract. Inverses from old to new crop futures are not common in corn, and generally occur in years like this, when ending stocks of corn are projected to be very tight.
In addition to the strong inverse, Minnesota famers are enjoying a strong corn basis (cash prices high in relation to the futures price). Like inverses, a strong basis is not common and generally occurs when stocks are tight.
I did a little "similar years" analysis to see if I could get a sense for price action in the spring. In particular, I examined years since 1990, when ending stocks were tight and old crop/new crop futures prices were inverted. Years that met my criterion of having a stocks/use ratio of 11 percent or lower were: 1993-94, 1995-96, 1996-97, 2003-04, and 2010-11. For perspective, keep in mind that the average stocks/use ratio was about 50 percent higher in all other years since 1990.
What did I learn from this look at years similar to the current year? I learned that cash corn prices have not reached the peak by March. Based on similar years since 1990, I expect corn prices to remain strong through the end of May, possibly through early summer.
I can’t help but the carry the question one step further and ask, What about prices this summer? That depends, of course, on the weather. Northwest Iowa and southern Minnesota are in the midst of drought. According to climatologists, this trend could continue.
If dryness persists, strap in for a ride because higher prices and volatility will return. Then again, if we can break the dry spell and return to a weather pattern that makes the Corn Belt what it is, I expect prices to turn lower, possibly sharply lower, by harvest.
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Edward Usset is an economist with University of Minnesota Extension.