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DAVID KRUSE

By Staff | Apr 30, 2010

The corn market has had a reliable history of posting significant price lows, approximately every 5 1/2 years.

The next timeframe for such a cycle low is this fall. Guessing how low the market will go is not as relevant as getting grain priced ahead of time, so sales can be avoided in the vicinity of the cycle trough.

There will be a fundamental reason why the corn market will dip, but that too is a guessing game. There are a number of potential candidates for fundamental triggers. These include:

  • A 14 billion bushel 2010 corn crop. We are off to a great start where farmers can plant all the acres to corn they want to. Weather or conditions don’t appear to be a problem to start the season. A 14 billion bushel corn crop could boost the carryover past 2.5 billion bushel.
  • Derivative regulation could force fund liquidation. Fund buying has benefited commodities, but some who don’t like higher commodity prices would like to regulate them lower by curtailing speculative investment in commodity derivatives.
  • Great Recession – Round 2 – Double Dip. The U.S. economic recovery is growing stronger, but is still very fragile. Several things could happen that could derail the recovery and prompt a retest of market lows. Citizen ire over bailouts and government action that rescued the economy initially may prevent the government from acting again if a repeat fallout occurred.
  • Economic setback in China/India. China’s economy is booming, which had been supporting commodity prices. Busts follow booms and eventually it’s the irrevocable law of capitalism and economics that China’s economy will experience a contraction. Beijing is tapping on the brakes now to slow overheating growth. There are a number of ways that the Chinese economy could blow out a tire, deflating global demand for raw commodities. This would be an even larger threat to the soybean market as China is such a dominate buyer, the soybean market is totally dependent on Chinese demand. China has huge reserve stocks of corn (40 million metric tons) and has been selling from its strategic reserve to cool inflation.
  • Sharp gains in the U.S. dollar. Europe’s sovereign debt problem is far from solved. Japan’s economy is still weak and deflating. The U.S. faces severe fiscal problems, but solutions to our problems may be easier to find than solutions for the EU and Japanese. The U.S. dollar is winning an ugly contest of currencies. The U.S. dollar is still the favored global currency when seeking security and the world is still not secure. The fiscal structure of the EU is not financially sustainable and the population demographics of Japan fit those of an aging nation and contracting economy. The U.S. dollar and commodity prices are closely linked, so that strength in the dollar brings lower prices.
  • EPA fails to permit increases in blending limits from E-10 to E-15. Ethanol margins have contracted despite lower corn prices because ethanol production levels have burdened the ethanol market, limited by restricted access to consumers. Low ethanol prices should spur more discretionary blending of ethanol, but the E-10 cap acts as a blending wall. Ethanol margins have weakened as the blending wall was hit and ethanol refineries will curtail production accordingly. The ethanol industry and corn growers need the EPA to act, raising the blending cap to E-15 so that blenders can respond and use more ethanol when supply is high and ethanol prices are low.
  • Congressional failure to extend the ethanol blender’s credit and tariff. Congress was in favor of extending the biodiesel tax credit which expired at the end of 2009. Yet, like a bunch of bungling Keystone Cops, Congress failed to enact the necessary legislation to extend the tax credit.

The result was the biodiesel industry shutting down. The ethanol blender’s credit and tariff expire at the end of this year. Different from the biodiesel tax credit, there is strong organized opposition to extending the ethanol credit and tariff that will have to be overcome.

The failure to extend the biodiesel tax credit was a terrible omen for ethanol. Failure to extend the blender’s credit and tariff will take a huge bite out of the economics of ethanol production, prompting another washout in the industry.

It will also result in a significantly down-sized industry that uses a lot less corn. This risk alone is enough reason for corn farmers to sign up for the ACRE program.

Of course, a combination of the factors above, or even something that I have not even imagined, could contribute to the coming 5 1/2 year cycle low in the corn market.

I sure hope it’s not all of the above.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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