What's Next for Corn?

Published on: 11:46AM Apr 22, 2010
The potential for extreme market volatility is high. This means we’re going to see both greater opportunities and risks. We could see corn rise to well over $5 or easily shed one dollar from here.
As many of you know, open interest in corn futures is defined as the number of contracts outstanding. High open interest occurs when trading interest among commercial entities, speculators (trading funds and index funds) and small speculators is high. As I write, corn open interest is at 1,522,807 contracts. It’s well above normal mainly because of the index fund activity—interestingly (and worrisome), fund activity is actually greater than when corn was at $8. We’re seeing these funds build large positions because they’re long on commodities and need to invest the dollars they have coming in.
Why bring this up right now, when you’re focused on planting? Because we’re watching some interesting market scenarios take place that could dramatically affect price. Additionally, now is the time of year when we face a lot of price uncertainty. It’s a great time to prepare to get the most money from your production.
High open interest hasn’t dramatically affected price . . . YET! However, it’s a telltale sign that there’s a lot of interest in the market and thus potential for volatility.
Consider the scenario in which index funds keep buying regardless of market fundamentals. These funds are highly sensitive to the overall economy. If they were to continue buying and our delicate economy were to falter, as some say the unemployment figures suggest is possible, the funds likely would sell off and could bring the price of corn down a dollar or more. With rapid planting progress and normal seasonal price pressure, this especially is a risk.
What about a scenario in which China becomes a buyer? Earlier this month, the market got spooked by this very possibility. As it turned out, prices weren’t really affected and the Chinese government sold its own state reserves to satisfy needs. You might feel comfortable believing that China is self-sufficient when it comes to corn. However, there was a time when we felt the same way about soybeans. Then China began buying relatively small amounts. Today, its soybean purchases account for roughly 16 percent of the world’s production.
Imagine these extreme scenarios:
  1. Farmers produce the anticipated abundant corn crop, the unfolding Goldman Sachs story gets really ugly, the stock market dives, consumer sentiment crashes and the economy recedes again. Index funds sell off because of the poor economy. Massive selling hits the market and the price of corn dives.
  2. We experience a drought, index funds keep buying and prices move up because of it.
  3. Even crazier would be a mix of the above scenarios. Then what could we expect?
It’s not likely we’ll see these extremes. However, any number of different scenarios could become reality. As I wrote last time, at least one and probably more of the scenarios you plan for will come true.
So what should you do?
Lots of people are predicting sideways to lower prices. Ask yourself if you’re ready for the possibility. Ask yourself if you’re prepared should the market head in the opposite direction. We’re not in the business of price prediction—we’re in the business of price preparation—but I can tell you that most farmers tend to react slower in a bear market that in a bull market. So if prices do move lower in 2010 and you are slower to react in a bear market, take time now to imagine all possible price scenarios and decide what you will do in each of them. Your reaction time will be quicker because you won’t be making decisions based on emotion.
Ultimately, when it comes to marketing, your focus should not be on what corn prices do. Instead, focus on being prepared for whatever they may do.
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at [email protected].
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