Lessons in Price History

December 1, 2010 02:56 AM

History may not repeat itself exactly, but it can provide a road map or at least guideposts to what is possible. It is widely agreed that we are in “a new era” in agricultural commodity markets and that rallies, such as those that occurred in 2008, are making new history. Young farmers weren’t around for the export-driven, bullish new era that launched in the 1970s. They may not even remember the supply-shortage bull markets of the 1980s and 1990s.

Bill Fordham of C&S Grain Market Consulting has looked at several factors of the current rally versus past rallies. His findings may provide some perspective on the market moves this year.

Lesson 1: Surges in Corn

The current bull market is moving faster than preceding ones, which peaked in late June. Using total cents and percentage moves of previous bull markets, Fordham notes that the potential high market closes in the lead option could set new records. “If daily lead-option corn continues to advance at a faster pace, it will probably be because of even lower production estimates, new demand discoveries, low ending stocks estimates, low stocks-to-use ratios and strong inflationary influences from the outside market factors that dictate money flow,” he says. “Unless the corn market takes a sideways rest soon, the inclination will be too steep to endure.”

Rally Year 1987/88 1995/96 2003/04 2007/08
Based on cents $5.35 $6.13 $4.50 $7.76
Based on percentage $8.03 $7.34 $5.22 $7.79


Lesson 2: Beans Keep Pace
The same factors are at play in the soybean market, but the fundamentals are not yet as tight as those in the corn market. To date, 2010/11 price levels have been advancing at a pace similar to the 2003/04 and 2007/08 rally years. While three of the past four soybean rallies traded a final peak from late June to early July, two of them experienced price peaks in March as well. The gains so far this year have surpassed the previous advance in the 1995/96 rally in cents per bushel, but that’s not the case when compared with percentage moves. Take a look at the table below to help navigate peak prices if the rally continues into 2011.

Rally Year 1987/88 1995/96 2003/04 2007/08
Based on cents $14.86 $12.00 $14.44 $18.92
Based on percentage $19.99 $13.93 $18.46 $22.53


Lesson 3: Positions of Traders
During the previous four strong bull markets in corn, the net open interest positions of noncommercials (large speculators) and commercials as well as total open interest and price have never peaked at the same time, Fordham reports. “This is very important information,” he says.

Large speculators and commercials reached their current maximum positions in the Commitment of Traders (COT) week that ended on Sept. 28, Fordham reports. “Prices made new highs two weeks later. If corn prices make new highs in the weeks ahead without the large speculators or commercials taking new high net positions, that may be a tip-off that the rally is getting mature. Price has never peaked before the net open interest positions of noncommercials or commercials peaked. One or the other may peak when price peaks, but not both at the same time.

“Unless either the large speculators or the commercials increase their net positions, the corn rally may be subject to a pause or topping action. Based on fundamentals, there is still more price action to come, but watching the COT will become increasingly important.”

Based on the changes in open interest and net positions of these traders in the past four bull markets, Fordham derives the following possible targets:

Bull Market Year 1987/88 1995/96 2003/04 2007/08 To date 2010/11
Large speculators net long percent of total open interest 17.4 31.6 31.7 26.6 32.4
Commercials net short percent total open interest -26.4 -21.3 25.2 -25.8 --


Open Interest Percent Gain 1996 Over 1988 2004 Over 1998 2008 Over 2004 To Date 2010 Over 2008 2010/11 Potential,
if average
Potential Contracts
Large speculators max net long 385% 151% 184% 119% 240% 946,991
Commercial max net short 164% 163% 175% 120% 167% -519,107


“If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience!” —George Bernard Shaw

Top Producer, December 2010

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