Fundamentally Speaking

Can Corn Futures Fall Below $3.00?

Joel Karlin
By  Joel Karlin , DTN Contributing Analyst

New contract lows were scored this past week as the corn market confronts a wide array of negative factors including ideas the crop to be harvested is unbelievably huge, stiff foreign competition in the trade arena based on large coarse grain crops overseas, macro factors such as a high flying dollar and the likelihood of higher interest rates and finally new peaks in the stock market further undermining any speculative interest in commodities.

Given the overwhelming bearish sentiment, it is often asked just how low corn futures can go?

We note that since the big paradigm shift in prices starting in the fall of 2006, $3.00 essentially has been the bottom of the trading range.

This graph shows corn futures in dollars per bushel and crude oil values in dollars per barrel since June 2005.

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Those points we identify as market bottoms (seven prior to this year's low) are marked by the USDA's corn stocks to use ratio for that month.

Notice that corn prices drew near the $3.00 level anytime the WASDE stocks to use ratio was near the 12.0-12.5% range.

The May 2012 ratio of 13.7% proved off the mark with 2012 production ravaged by drought while last November's 14.5% ratio is now 8.7% for the 2013/14 season due to better demand and less output than had been forecast.

The latest 2014/15 stocks to use ratio was estimated earlier this month at 14.7% and if that sticks it would be the highest ratio since the 2005/06 season.

With talk that the 2014 U.S. corn yield could be 176 bpa or greater and limited ability for the USDA to increase demand above what is already a record level suggests this ratio could creep higher in coming months.

One factor we thought that may support corn prices above levels suggested by past stocks to use vs. price scatterplots were crude oil prices given the relation between corn and ethanol values.

With the exception of the price crash associated with the 2008 financial collapse, crude oil prices have at least stayed above the $70 per barrel level providing a modicum of support to corn.

That linkage may be loosening as the moving three year correlation between corn and crude oil prices that averaged a positive 0.79 between June 2008 and June 2012 has now fallen to a recent low of -0.49 in recent weeks implying buoyant crude oil prices no longer have the supportive impact on corn prices that it used to have.

This factor and perhaps a larger stock to use ratio than currently forecast may provide the impetus to push corn prices down to their post 2006 lows of $3.00 per bushel or lower.

(KA)

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