Watching the corn crash in Chicago

What a difference a few days make! I have said that before and I probably will again.

A few days in the corn markets on the Chicago Board of Trade have made over $1.15 difference, and it is down. That would be all the market range for a year or two normally, but we did it in 10 trading days this time around.

I suppose we will eventually get used to this brand of volatility, but I am not sure if there are lasting lessons to be learned from the huge price swings we have seen this year.

The break, from $7.96 December futures on June 27 to $6.80 1/4 July 14, was actually only just over a 50 percent retracement of the previous bull move (actually 58 percent).

We gained $1.96 1/4 in the month before the break. Thus, a technical trader considers it a mere correction.
I may be too old to adjust to the idea of a $1 “correction.”

Rationale

Most interesting is the rationale given for the break. It is also self-satisfying in a perverse way. A few columns ago I said that some day we would switch over from the thought that the flooding in Iowa and the Mississippi Valley in general was destroying the crop to the conventional idea that “rain makes grain.”

Apparently the last two weeks we have done that.

Watching the John Deere Classic on TV this weekend, we all saw the overhead shots of the flooding close to the golf course on the Rock River in Illinois. In the distance was the distended Mississippi.

Since the evening news has moved back to politics, it is easy to think the floods and their damage are over.

They are not, but their effect on the market is. Yesterday’s news is yesterday’s prices. This is today.

And, today, the interest is in ideal weather for the acres that are not flooded. Two weeks ago the market topped, not on the flood, which was old news, but on worries of hot, dry weather in the West.

Those forecast changed to more moderate and wetter weather. The result was traders realizing they had overreacted, and the huge correction we just saw.

Evaluate

Now, we evaluate what the crop is, again. Did we over do it? Or, is there more damage than is in the market? The conventional view is that every USDA Crop Production Report from here on out will get bigger.

I don’t know if the new demand picture is in the market. Simply, the astronomical prices have hurt demand. Feeding is down. Every day, it seems, we read of another ethanol plant declaring bankruptcy or closing or not building. The cure for high prices, over time, is high prices.

While the corn was crashing, soybeans were gyrating. Yes, they went down from the all-time high of $16.35 July 3 to $14.83 July 8. That is an amazing $1.52, but it doesn’t look that big on the huge bean chart.

The November futures then bounced right back to $16.17 July 11. The thought seemed to be that what was good for the corn crop was not for the beans, and vise versa.

July 14 prices settled at $15.59, so the beans have been relatively unscathed by the corn break. That is, if an adjustment of 75 cents seems to be minor.

The Chicago wheat was off nearly $1.60 in the same 10 days as corn and I have no clear thought why. Harvest is in full swing and the talk of a small and damaged crop seems to go away while the combines are still rolling. Or, maybe the wheat was just hyped up while corn was trading at the limits, pulling it up past value.