by Darin Newsom, DTN Senior Analyst
I’m sure most of you are familiar with the Super Bowl — the championship game for the National Football League. Up until 2003 the game was played in January, putting a clean end to what had been a long season that started back in August. Now the extended playoff format has pushed the game back into early February, but the result is the same: We know the outcome and a champion is crowned, marking the end of the long season.
In a way, grain markets have their own Super Bowl every January. Near the middle of the month, every year, USDA releases its plethora of supply and demand numbers ranging from final production and ending stocks for the previous marketing year to quarterly stocks and winter wheat acreage. All told there is a little something from everyone, though year in and year out it seems corn garners the most attention.
Rightfully so, as corn remains the kingpin of the ag sector. As discussed in this column many, many times over the years, the demand market that has pushed grains higher began in corn and some argue will ultimately end in corn as well. Whether or not this end occurs in 2012 was talked about in last week’s column (“The Beginning of the End”). While the end of times remains an unknown, what we do know is that the supply and demand numbers for corn will be closely scrutinized upon release the morning of Jan. 12, 2012.
On a side note, this date is important to me beyond the reports as my first day at DTN back in 2004 coincided with USDA’s reports. Those of you who know my opinion of government reports will likely see the irony.
In the coming days, I will put together DTN’s report preview where I will look at all the different supply and demand issues expected to be covered. For this column, I want to talk about a different aspect of the report — the effect it has on the corn market itself.
I’ve long been a proponent that the market in general is smart enough to see beyond mere numbers, focusing on long-term fundamentals and investment views. However, a quick study I put together casts doubt on how logical the market is these days. Since 2007, the corn market has moved limit up or down on the day of the January USDA report. In 2007 and 2008 that meant moves of 20 cents. From 2009 through 2011 the market moved 30 cents lower twice (2009 and 2010) and 30 cents higher once (2011).
If you were to guess how many times during the five years prior to 2007 the corn market saw a limit move on report day, how many would it be? One? Three? Five? For those of you that guessed “zero,” you get an old corn cob as a prize. Not only did the market not post a limit move, only once did it legitimately challenge limits with a 17 cent rally in 2004 (welcome to DTN, right?).
Now, think about what has happened to the market that could have led to this increased volatility. Those familiar with this column have probably figured out the answer to this question. In 2005, the Chicago Mercantile Exchange and the Commodity Futures Trading Commission changed position limits in corn from 5,500 contracts (July 2005) to 13,500 contracts (post December 2005). This opened the floodgates for investment money to come pouring in at about the same time as the newly established Renewable Fuels Standard of 2005 took effect, creating the demand market (both investment and commercial) in corn. The market showed slow growth initially, until the fall of 2006 when ethanol demand for corn was estimated to climb above 2 billion bushels for the first time (2006-2007 marketing year). I can clearly remember September 2006 when investment traders finally came pouring into corn and have not looked back.
By January 2007 both the commercial and noncommercial traders were at full froth. The release of the report was quickly digested and the corn market exploded. With another limit move seen in 2008, essentially blocking trade for the ever-growing throng holding positions, daily price limits were increased to 30 cents. However, as I pointed out earlier in the piece, this didn’t solve the problem as the last three years have seen limit moves on report day.
What does this tell us about the market? First and foremost, maybe it isn’t as intelligent or all-knowing as I once thought. This past year showed us how important headlines have become, as computerized trading algorithms seemed to switch from bullish to bearish and back again on a daily basis depending on what the latest news flash was.
But what I’ve also noticed, looking at the long-term monthly chart for corn, is that the hysterics surrounding the January report don’t change the long-term trend. Maybe the market sees a short-term change in direction, but sooner or later it returns to its long-term pattern until an actual change in supply and demand, or investment outlook is seen. This year is likely to see more of the same, so don’t be too surprised if during next Thursday’s session the nearby March corn contract makes another limit move. It’s just doing what comes naturally these days.
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Posted with DTN Permission by Haylie Shipp