The Corn Market In June 2006 Versus June 2007: Have We Learned Anything?

July corn futures have dropped to $2.29/bushel.  In fact the September corn futures have dropped to $2.41 with the December contract dropping to $2.55/bushel.  It is not the best of times.  But wait a minute.  I must be dreaming.  This isn’t June 2006, it’s June 2007 the world has changed and all of us have changed with it.

I thought I’d take you back there for a minute to portray how the psychology of this corn market has changed.  I started writing corn market commentary for the Ontario Corn Producers Association in June of 2006.  At the time Canadian corn producers had just slogged their way through a devastating defeat over the countervail issue.  As we headed through June 2006 corn prices were in the basement and nobody could see what was coming ahead.

It’s like that old saying; you can’t see the forest for the trees.  On June 14 2007 the July corn futures finished at $4.09, the September at $4.17 and big daddy December has caught fire at $4.17/bushel.  If you had told me a year ago when I was writing “Market Trends” we’d have futures prices like that, I’d find it hard to believe.  Those “bad old days” in June 2006 seem like a B movie clip from lower Gongoland amidst the manifestations of the 2007 ethanol gold rush.

The question is what happens now?  How could so many of us last year be so wrong?  Why should anybody put any confidence in us now when so many missed the corn boat in 2006.  Last September 1st December corn futures were at $2.48 bushel.  It was like all of us were standing on the edge of the mountain looking down.  We all know what happened next.  My question all last fall winter and spring was why didn’t anybody see the market reacting so violently up?

I’ve put that question to more than one “grain expert.”  Remember, its my job to tell the story not necessarily predict what the grain market will do.  In my mind the grain market compared to many other markets is a killer.  So when I ask the experts I expect them to know a little more than me.  The quintessential answer I’ve gotten was it’s all hard to believe.  I got answers like this.  “We all felt it was going to move up but nobody knew when.”  “The market was like a coiled spring just waiting to let go.”  The rest as they say is history.  We all know how volatile corn futures have become.

So have any of you taken positions in the 2007 corn market, which give you that warm feeling?  I hope so.  When we were marching through the snow in 2006 at different farm rallies I think we’d take these futures prices.  Opportunities abound right now to price Canadian corn.  The road ahead nobody knows.  We may yet go through some very uncharted water.  All the stars are starting to line up.  However when you start to feel giddy in this very dry spring of 2007 take a look at last year at this time.  It seemed the grain bears were everywhere the psychology was all the other way.

The elephant in the room for Canadian corn producers in “basis.”  The bigger elephant in the room causing some of that basis angst is the loonie.  Going from 84 and change to 94 and change in five months ruined part of the pricing party.  In Ontario with little wheat in the ground, we’re expecting 2.2 million acres of corn to be harvested.  That’s the most since 1981 and corn buyers are waiting for the big glut at harvest.  These things combined have caused a huge negative basis for new crop corn.  The only thing, which may change that in June 2007, is Mother Nature and a falling loonie.

Last year at this time I wrote this.

“As we move into summer, “its all about the weather.”  For those holding old crop in Ontario the gig is almost up.  The dynamics of pricing corn surrounding the countervail action have almost played out.  Any future old crop price appreciation will be based on a disastrous summer drought or a sudden free fall in the loonie”

It’s kind of comical to think of that now.  Yes, if guys held old crop into October they would have been rewarded.  No, we didn’t have a drought last year but we did end up with a 10.5 billion bushel US crop and the loonie dropped from 91 cents in June 2006 to just under 85 in January 2007.

What should we learn from that lesson?  The key lesson might be “demand, demand, demand, demand.”  Last year we were all so focused on supply, supply, supply at a time when pent up demand was coming on stream.  So now we’re working with a lot more acres and a lot more demand.

Clearly there is much to think about at these elevated futures levels.  It’s now getting down to crunch time.  Rain does make grain but of course when is that going to happen?  Of course nobody knows.  As the July 4th weekend looms, hang onto your hats.  And keep a hand on that wallet too.