The chart that I have included in my annual outlook presentation longer than I can remember is the Purdue University 29-year corn price cycle. The corn price cycle starts with a base equilibrium lasting about a decade, followed by a launch when prices respond positively to having built a demand base, and then a spike higher when a drought or some other fundamental exacerbates supply and demand tightness stetting the price high for the cycle. High prices cure high prices and farmers respond by adding production. The Dakotas became a major corn growing region. Prices then fall and slide into a landing. Another base equilibrium follows which creates the base for the next bull market. The new base equilibrium develops at a higher price range than the original.

In the current cycle, the initial base price range was $2-3 basis December corn futures ending in 2006…deducting for the basis that was below the cost of production. Farmers kept producing corn with farm subsidies including LDPs, while new value-added demand was developed. Corn end-users could make money from cheap corn and were the indirect beneficiaries of the farm subsidies. Cheap corn eventually founded the ethanol industry and farmers invested to create a third leg of support for corn demand…adding ethanol production to feed and export demand. That launched the breakout from the base equilibrium in favor of the bulls. Prices rose and then weather conditions and Macro-market factors fueling investment in commodities propelled corn prices to $7-8 bushel in 2012. That set the price high for this long-term corn cycle.

Corn profitability pulled land into corn production expanding the corn belt and encouraging foreign corn production as well. Previously marginal areas for corn production expanded vigorously. The U.S. corn-belt essentially moved its center of gravity west and north. The high was set and decline began as prices fell looking for a new base level of corn price support. The ethanol industry, while struggling, did not go away. The new base equilibrium has developed in a price range of 3.15-4.50. We are only four years into the new basing period so it could continue to go on for several years yet. It will be a grind where those who cannot produce corn for these prices will eventually quit voluntarily or by financial necessity.

There is some limited upside margin in current prices near $4 for December corn to the top of the trading range near 4.50. Any rally generated by bullish news needs to be sold by producers. Farmers are losing money; input costs have not abated enough to generate profitability and we are in a battle of attrition as weak hands are forced from the game. That is how low prices cure low prices. Unfortunately, that can take a few years to finish.

It was noteworthy that while farmers are not making money, the adjustments made by USDA to the annual supply/demand report for corn reduced their projection for feed usage, ethanol crush and exports. There are things going on impacting the demand side with trade and RFS policy that have inhibited end-user demand from strengthening despite corn prices being at or below the cost of production. Livestock producers all expanded thinking that exports markets were healthy and then the trade war undercut them. Ethanol producers should be making money given current corn prices but then the Trump administration undercut the RFS with RIN waivers and the industry is throttling back production. It is likely that USDA will reduce their estimate for ethanol crush demand further in subsequent reports.

The USDA reduced their estimate of the size of the 2018 corn crop, which if demand had held up, would have been bullish as the carryover would have tightened.

Grain and soybean farmers are struggling to be profitable. They have lost money for three years now living off of equity. I have discussed the state of the farm economy with a number of bankers and they paint a picture of purgatory for farm finances. They do not see a lot of farmers failing like those high-lighted in recent media articles with the storyline of a pick-up in Chapter 12 bankruptcies. The failures are regional and by commodity. Small dairies and those who lacked the equity to give them sustainability during this period of absent profitability were first to go. Farmers are hoping that this test of their bank balance and psychology will end soon and better days will return.

The 29-year corn price cycle suggests such optimism is premature. We likely have to grind through a few more years where a larger attrition occurs where farmers tire out either financially or mentally and either do something else or retire.

ISU’s Dr. Elwynn Taylor forecasts that there is a major drought cycle, that should rhyme with the drought period of the 1930s, that is just a few years away. That would be a prime candidate for the fundamental launch of the next up move in corn prices. There is no shortage of corn in the global carryover. We need something significant weather-wise to give the kind of shock to the balance sheet where supply falls short of demand.

Dr. Taylor did not see this in either South or North American grain production this year…nothing to push us out of purgatory. We expect that we will have to work with the price range we are in.

Part 2 will come next week.

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.