Is there a grain farmer anywhere who doesn't like a good bull market in corn and soybeans? Possibly, but you would have to search hard to find one. The last bull market occurred in 2004, which was eight years after the granddaddy of bull markets in 1996.
Ironically, that bull market was eight years after the 1988 bull market. If the cycle continues, the next major bull market in corn won't occur until 2012.
Some may conclude that 2012 is too long to wait. If history repeats itself, however, that should be another “granddaddy” of bull markets, taking corn prices to new all-time highs. And if percentage changes in price mirror the other bull markets since 1970, corn prices could well hit $7/bu.
Now don't go running down to the coffee shop or a grain elevator and post this article or tell everyone that I'm predicting corn will go to $7/bu. What I'm saying is that it's a reasonable possibility, but not until 2012.
Now let's take a look at what's really going on in the shorter term that will affect cash flows over the next one to two years.
The bad news is the biggest bull market is a long way off. The good news (bad news if you're not patient) is the corn market should be approximately two years away from a major bottom that will represent the lowest corn prices we'll see for several years. The chart below tells a revealing story. You'll note that with the exception of 1980-1982 when from peak to bottom took 21 months, the extent of all-over bear markets has been fairly consistent.
Following the peak in 1983, the next major low occurred in 1987, a span of 42 months. From the peak in 1988 to the bottom in 1993, 51 months transpired. From the 1996 peak to the trough in 2000, 49 months expired.
The last major peak was in April 2004 and again, if history were to repeat, the next major bottom in corn should occur in the summer of 2008 — two years from now.
How and why could it possibly take that long to end the current bear market? Consider the following points:
Ethanol expansion is terrific, but even at the current pace of building new plants, we estimate that in 2005-06, 1.575 billion bushels of corn will be crushed for ethanol and in 2006-07, 1.77 billion bushels. By 2007-08, corn processed in ethanol plants should exceed corn exports, which this year are pegged at 1.85 billion.
While this increase in usage is fabulous for long-term demand, in the short-term carryover supplies this year are still expected to be 2.4 billion bushels compared to 958 million in 2003-04. Carryover by the end of next year would drop to 2.29 billion bushels if trend line yields occur this coming year.
Two years from now we'll also start feeling the impact of a new farm bill. While no one knows for sure what that's going to be, let's assume that the LDP program is either modified or put to bed completely. The LDP program has been the primary motivator for lower corn prices. If it's not there in full force, that alone could start propelling some higher corn prices. We'd get the money from the market and not from the government.
Patience Is The Best
With this year's carryover projected to be 2.4 billion, even with the slight reduction in planted acreage this coming year and a normal trend line yield of 150 bu./acre, carryover will only show a very modest decline.
It will either take an extreme sharp drop in planted acreage and/or a yield of 140 bu. or less nationwide. The odds of the latter are slim to none and I think slim already left town.
So give this market some time and the law of economics will continue to work. Keep the price of corn low enough long enough and someone will find more ways to use it and at the same time may even discourage the planting of corn worldwide. High prices motivate increased production — not low prices.
For the next several months the corn market could well be back into an era similar to the late 1990s when futures prices continued to drop to meet the cash market. Local demand as a result of many new ethanol plants will change the price cycle in those areas.
Basis levels for almost every reader of this publication have improved tremendously in the last two years because of the ethanol industry. That trend will continue, which will help support the cash market, but it's not enough yet to result in a major bull move.
Bull moves in corn have always been associated with supply side fundamentals (droughts and floods) and not by demand alone. The next few years should provide plenty of excitement as well as profit opportunities.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.