Heading Toward a Train Wreck? Deciphering Corn Markets In 2007

Markets rumbled this past week as corn, wheat and soybeans went through some terrific volatility.  At one point farmers were checking to see if we were going back to the bad old days like the early fall 2006.  By Thursday markets had decided that maybe they were a bit over sold.  Deciding how the ethanol gold rush will proceed is surely on the minds of every trader in Chicago.

A few weeks ago when the market was just starting its move up I wrote a piece on how high corn prices might impact cattle and hog markets in the US and Canada.  I also mused how this might be looked at in foreign lands like China, Argentina and other nations.  It’s pretty obvious, depending on where you sit, higher corn prices are set to spin our agricultural world out of control.

Or is it?  It’s important to ask that question.  When corn futures dropped double digits a couple of days last week, I’m sure there were many farmers asking what all the fuss was about.  Maybe just, maybe, this ethanol gold rush might not have $6 corn futures in our future.  Laugh if you want, but that’s exactly what some farmers have told me where the ethanol gold rush is going.

Yes, keep in mind its important to be realistic about this.  There will be price corrections like we’ve seen this past week, but from my perspective the bulls have left the building.  They might get bloodied a few times in the near future, but eating choice hay is their goal.  2007 is shaping up, as the year the corn/ethanol/price/acres train wreck will play out.  I cannot see going back to early 2006 futures prices in the near term.

Of course if we knew what futures prices were going to do, we surely wouldn’t farm.  We’d sit by the beach with a cell phone.  However, it is interesting to see how the whole world is “planning out” this new bio-fuel driven world agricultural economy.  In short, it’s changing domestic agricultural policy around the world.   Who knew the price of corn could cause such havoc?

This was brought home to me earlier this fall when I heard from one of my seed corn dealers.  He related to me a news report out of Argentina regarding the increasing price of corn futures.  I was sent the news report and I saw what he meant.  Argentina in mid November suspended grain and oilseed exports for at least one day.  Exports had recently increased in Argentina and the government had grown quite concerned especially in the light of wildly high corn futures.  According to the Reuters news report “Argentina’s center-left government was concerned about rising prices for basic foods in the domestic market”.  I took that to mean Argentina was concerned about their food supply, something you never hear about in Canada.

However, it quite revealing to consider this Argentine concern for their food supply.  Surely they are concerned but Argentina is a big agricultural exporter so giving up their exports is really a non-starter.  What might be more of concern to them and many other countries are the potential shifts in world production and demand and how that might play out for their own domestic politics.

China is a good example.  Ethanol is the main bio-fuel used in China.  Corn prices have increased there too.  Combine that with their burgeoning economic growth and you have a “demand factor” arguably relatively greater than what we have here in North America.  Corn represents 76% of the raw material used for Chinese ethanol.  I’ve said it before.  China’s corn train wreck will happen the day they start importing significant amounts of corn to satisfying their burgeoning demand.  It hasn’t happened yet, but the train is surely barreling down the track.

Other countries like India, Brazil, New Zealand and FSU (Former Soviet States) will surely adjust too.  There will be seismic shifts in corn production, but also beef and pork production.  Farmers fueling cities will surely move any feed source for livestock to higher levels.

Keep in mind one fundamental error many agricultural academics are making.  I’ve heard it a million times.  It’s this.  Commodity agriculture in Ontario (or Canada for that matter) is dead, a future and present non-starter.  Brazil and other low cost producers will bury us.  I say “Bunk!”  It’s a fallacy purported by many academics and theorists isolated in public arenas far from the farm gate.  How stupid they looked during the latest price run up in futures.  They ignore basic agricultural economics.  They ignore the ingenuity of the Canadian farmer.

So at the end of the day I see “the universe unfolding as it should.”  The bulls are still loose.  The train wreck in front of us with regard to price/acres and demand is coming.  The world’s agricultural nations are shifting their resources and policies.  Canada is behind, but it needs to get there too.  A solid, sustainable and bankable agricultural safety net for all the country’s farmers would be a great way to help them capture these future opportunities.