All-Time Record High Prices for Corn by the Summer of 2007

A prediction by Peter J. Kordell, President, Slipka Financial Partners
Let me state up front that I believe July ’07 corn futures (currently trading at $3.50 per bushel) could see all-time record high prices by next summer. From this premise, let me make my case.

click on the chart to enlarge
Weekly Corn Prices
Weekly Corn Prices
I started trading commodities in 1968. During my 38 year career in the futures industry, I have witnessed or participated in every all-time high of every futures market currently trading. One thing I have learned about markets that are making new all-time record highs is that there comes a tipping point when frenzied buyers forget about fundamentals and rational pricing. Prices rise to record highs on emotions and not on sound reasoning.
A good example of this came in 1973 when soybeans made its all-time high. Prior to that year, the record high price for over 30 years was around $4.50 per bushel. In the years just before 1973, demand had been growing and our crop production was not keeping pace. There had been no droughts to suddenly reduce supplies; instead, a steady increase in the demand for protein was a new element in the marketplace. In 1973 a new trade pact with Russia was signed for them to import our wheat. This was a first and it excited the trade. Once that deal was signed, additional agreements for soybean meal were quickly added for Russia and the Eastern Bloc countries.
The east’s per capita meat consumption was so far behind the west that the need for protein feeds was incredible. As the winter of 1973 unfolded, we were penciling in that at the current rate of usage, we were going to run out of soybeans. In those days, Brazil and Argentina were barely growing any soybeans and were no competition as they are now. Thus there was no one to rescue us from running out of soybeans until the fall harvest.
By February of that year, prices were making new record highs and in the first week of March the price reached an all-time high of $6.27 ½, a price never seen before. The feeling by most commercials was that this was a ridiculously high level and was not justified by the fundamentals. They sold heavily and prices retreated all the way back to $5.06 by the end of March.
When the market started to recover and again approached $6.27, commercials started selling heavily, confident those levels would hold again. Prices did bounce along at that level for five days, but they didn’t break like the month before. On April 25 all hell broke loose. The market opened limit bid and never traded, then locking prices up at $6.33 ¼, another new all-time high. For the next seven consecutive trading days, the market opened locked limit up and never traded (except for a handful of orders at limit up). Over the next twelve of thirteen days, soybeans either traded at or locked limit up.
Some commercials were losing over a million dollars a day during that period because the cash got called away from them, and they couldn’t get out of their hedge. By the end of the twelfth day the price had reached $8.25 ½. For four days the market chopped as traders took some profits and commercials were able to square up their positions. It was the only time I can remember when the small speculator and the pit traders so thoroughly beat up the commercial trade.
With a battered commercial trade backing away from the short side, there was no one to take the other side of the next bull stampede. After the four day rest, the market exploded again. To try and clear the market of the buying pools that developed at limit up and to find a price that the market would trade freely, the CBOT starting raising the daily trading limits from 15 cents per day to 20 cents, then to 30 cents, then to 40 cents, and finally to 80 cents. Twelve more limit up days passed (with most of them locked limit up) before the all-time record high price of $12.90 was hit on June 5, 1973.
At what price level did we stop trading sound fundamental pricing and tip into the realm of delusional madness of the crowd (tulip mania circa 17 century in the Netherlands)? After the new crop was harvested, prices traded mostly in the $5- 7.00 price range. I suspect that $7.00 was where the peak fundamental values were prior to the harvest, and everything from $7 to $12.90 was the frenzy of the crowd.
It’s important to remember, that when making new all-time record highs, fundamentals only take you part of the way; emotional frenzy does the rest.
Another quick example is in the current crude oil market. We currently have substantially more inventories of crude oil and its products, and natural gas than we did in 2003. In that year the summer high for December 03 crude oil was $32.55 and the price on this date was $30.16. Today the December 06 price is 59.38 and the high for the year was 81.00. How much fear and risk premium is in this market and how much is sound fundamentals? My guess is that there is at least $15-20 per barrel of fear in today’s price of crude oil.
Now let’s turn to the current corn market and see why I think prices will see an all-time high by next summer. For the past three years we have been producing a corn crop of between 11.0 and 12.0 billion bushels (11.3 billion on average). We have had scattered weather issues such as drought in some areas and record yields in others. Overall the crop has been neither great, nor a debacle, much like soybeans were before their 1973 price run.
In 1973, soybeans had a new demand wrinkle when the Soviet’s and the Eastern Bloc countries became new buyers. In 2006, corn has a relatively new client whose growth has gone ballistic; the ethanol producer. This is the X-factor that could drive corn to all-time record highs.
As the U.S. strives to find energy alternatives to petroleum based products, corn ethanol has emerged as a major new source of renewable, domestically produced fuel. There are 101 ethanol plants currently operating and 46 new ones under construction. The projected growth in the demand for corn for ethanol this year is expected to be a whopping 35%. Since the new plants are even bigger than the old ones, I expect this growth rate to continue over the next two years. For the first time in history, corn demand for ethanol will be larger than our exports of corn by sometime late in 2007, if these predictions come true.
As the world’s largest corn producer, we are the only major exporter of corn. If the world wants corn it has to come to the U.S. Over the past three years corn exports have been growing by 5 ½%. This should continue. In fact for the current crop year the USDA has U.S. corn exports rising 4.7%.
So far this year, how are exports unfolding? Are we pacing the USDA’s projected 4.7% increase in our exports and total commitments to date? Astonishingly, our total commitments are running 39.3% ahead of where we were at this time last year.
Yes, we are only two months into this crop year but this demand pace tells me something important: the world wants our corn now. They see the huge demand potential against a limited supply and they are afraid prices are going to skyrocket so they are grabbing as much as they can now before prices explode. They are willing to own inventory and lock prices up now before the basis squeeze on exports prices hits the market next spring. This is tremendous insight into how bullish this market is.
I believe we have a perfect storm developing in corn. Domestic demand will remain steady. Animal numbers are up across all protein sectors by 1 to 3%. We have the largest cattle inventory ever recorded. Feeding margins are still good, so there should be little drop off in the demand for corn.
Also consider this: Thirty years ago many family farms would have a few hundred head of hogs in pens around the farm to make a few extra dollars when feeding margins were good. If margins turned bad, they wouldn’t replace the feeders and the elasticity for corn demand would easily fluctuate with feeding profitability. Now, however, we have corporate farms and very large family farms where huge capital investments in farrowing operations and per head contracts with major packers are in place. These operations are far less susceptible to operational changes because of the huge capital investment. I see far less price elasticity in corn today than 30 years ago in the domestic feed business.
However, it should be noted that the byproduct from producing ethanol yields a mid-level protein and carbohydrate feed that can replace some of the corn fed to animals. Therefore, for purposes of this report, I am not increasing the demand for corn for animal feeding, even though animal numbers are up 1-3%.
The table below shows the demand situation for corn for last year, this year, and my initial projections for the year after.
Three-year Demand for Corn
In millions of bushels
2005/06* 2006/07* 2007/08**
Feed & Residual 6,141 6,100 6,100
Food, seed, & industrial (ex. Ethanol) 1,375 1,390 1,400
Ethanol 1,600 2,150 2,902
Exports 2,150 2,250 2,374
Total Demand 11,266 11,890 12776
*USDA projections
**Peter Kordell’s initial projections
To meet this demand, we can look to how much supply we have available. This combines old inventories carried over from previous years, the new crop, and imports. The table below shows the supply situation for corn and how much would be left over if the demand projections above are correct. For my projections I have assumed a crop equal to the average of the past three years which would be 11,275 million bushels.
Three-year Supply for Corn
In millions of bushels
2005/06* 2006/07* 2007/08**
Carryover from previous year 2,114 1,971 996
New crop production 11,112 10,905 11,275
Imports 11 10 10
Total Supply 13,237 12,886 12,281
Ending Carryover 1,971 996 (495)
Acreage Planted (million acres) 81.8 78.6 82.8
It is clear that based on my projections we would run out of corn sometime during the summer of 2008 unless we dramatically increase our acreage to corn this spring.
Since soybeans and corn are grown in the same areas of the country and usually are part of a farmer’s crop rotation, they compete for acres planted. Each year a farmer has swing acres of 15-30% where he/she can shift things around to plant more of one crop than another. I looked at 25 years of history so I could see whether there was some price relationship between corn and soybeans. This would help me predict whether high prices of one relative to the other would dictate how much of an increase or decrease in planted acres we would see for each crop. (Some additional acreage could come from wheat, cotton, other feed grains, and sunflowers but the majority is switched back and forth between corn and soybeans).
One thing I noticed right away was that on average the amount of year over year increase or decrease in acreage is only about 4-5%. Only six times in the past twenty five years have we increased corn acres by more than 8.0% with the highest being 11.6% in 1996, (the year the current record high was set).
There is a correlation between the soybean/corn ratio and the current price levels of these commodities that can predict how much of a switch we might get. I did my study using March 1 futures prices and compared that with the prospective planting intentions report. Based on current price levels of 644 ¼ for soybeans, 335 ¾ for corn, and a soybean/corn ratio of 1.92, my regression analysis would predict an increase in corn acreage of 8.5%. If I plug this number into my supply forecasts below, the new table would look like this.
Three-year Supply for Corn
In millions of bushels
2005/06* 2006/07* 2007/08**
Carryover from previous year 2,114 1,971 996
New crop production 11,112 10,905 11,618
Imports 11 10 10
Total Supply 13,237 12,886 12,624
Ending Carryover 1,971 996 (152)
Acreage Planted (million acres) 81.8 78.6 85.3
As you can see we will still run out of corn by the summer of 2008.
I decided to come at the problem a different way. If I wanted to keep next year’s carryout at this year’s projected carryout of 996 million bushels, then we would have to produce a crop large enough to meet the 12,776 million bushel demand projection.
With an average yield of the last three years of 153.9 bushels to the acre, we would have to harvest 83.0 million acres. Since the average amount harvested is 88.5% of that planted, we would have to plant 93.8 million acres this coming spring. This is an amazing 19.3% increase, a level of increase never seen before.
When I re-ran my regression study and asked the question, “If we get a 19.3% increase in corn plantings and a decrease of 17.3% in soybean acreage, what would the soybean/corn ratio have to be on March 1 to induce farmers to make such a switch”? The answer is really amazing.
The soybean/corn ratio would have to be 1.16:1. That means that if soybeans are trading at the current level of 644 ¼ come March 1, 2007, then corn would have to trade at 555 ¼. This is a new all-time record high (the old high was 554 ½ on July 12, 1996).
Since an acreage switch of this magnitude has never occurred before, and a 17.3% decline in soybean acres planted would have a stimulating effect on the price of beans, it is my belief that we won’t see this big of an acreage shift. I believe it will only be around 10%. This will mean we will be forecasting a less than zero carryout for 2008. Therefore, supplies are going to have to be price rationed, and it is my experience that it is this type of demand driven market that produces all-time record high prices.
Some may say that this is not a concern for this year but for the summer of 2008 because the squeeze won’t come until then. I disagree. My belief is that it must happen this spring to get the acreage switch needed to make sure we get as much corn planted as possible. The price rationing starts now, not later. Importing countries have recognized this; that’s why the pace of our exports is so brisk.
Once farmers fully understand the significance of this their remaining inventory is going to be put away. The perfect storm of competition between feed users, ethanol producers, and exporters are going to collide this spring and have to fight over a very limited amount of supplies. So batten down the hatches, it’s going to be a wild, bumpy ride.
If you want to know the strategies we’re using in this market, give me a call at 800- 481-1613, or email me at
Disclaimer and Notice of Risk
Derivative transactions, including futures and options, are speculative, complex, and carry a high degree of risk, and a substantial potential for loss. Only risk capital should be invested. Commodity futures and options trading is not suitable for everyone.
Additional voluntary risk statement from the desk of Peter Kordell
The above report is my opinion and since I have no corner on being right, the outlook may not materialize. Demand could drop off faster than predicted and prices may not rise. There are no guarantees that events will unfold as described above and you should always consider carefully your investment decisions when reading reports that make such predictions as “all-time record highs”.


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