Final month, I launched a selected kind of market analysis, referred to as related years analysis. Similar years analysis is a take a look at worth motion in years that share related fundamentals. My March column appeared on the soybean market and years, like this yr, when the Jul/Nov (outdated crop/new crop) unfold was working a large inverse.
This kind of analysis is intriguing sufficient to name for an encore, with a distinct elementary issue and a distinct crop. What elementary issue has my consideration this month? Sturdy demand for corn is drawing down provides and by the tip of the crop yr, corn shares are projected to be the bottom in 7 years. What occurred in related years with tight corn shares?
First a phrase on the easiest way to measure shares. Ought to we merely take a look at complete bushels? It makes extra sense to have a look at shares relative to utilization. I’ll illustrate the distinction with an instance. In February, USDA projected corn ending shares at 1.5 billion bushels, roughly the identical as on the finish of the 1994/95 crop yr. The distinction? Again then, complete demand was lower than 10 billion bushels. At the moment, complete demand is edging in the direction of 15 billion bushels. What was ample corn shares in 1995 is just a bit over 5 weeks of utilization in 2021.
Since 1990, endings shares of corn have averaged 7.2 weeks of utilization, with a excessive of 12.5 weeks (1992/93) and a low of 2.1 weeks (1995/96). I chosen tight shares years, outlined right here as years when the February WASDE report was projecting ending shares at 6 weeks of utilization or much less. Twelve years match the definition and it’s attention-grabbing to notice that 9 years sported tighter shares than the 5.3 weeks projected in 2021 (BTW, it’s a must to return to the 1973-75 crop years to seek out extra years with ending shares lower than 6 weeks.)
The next desk focuses on these 12 years. Moderately than checklist the years chronologically, I selected to checklist them beginning with the tightest shares projection. For instance, the February WASDE report projected complete corn utilization within the 2010/11 crop yr at 13.5 billion bushels. Do some math and you discover that 675 million bushels of projected ending shares would cowl simply 2.6 weeks of corn utilization. That’s not a lot of a cushion earlier than the brand new crop is harvested.
December Corn Futures, 1990-2021
Years when projected corn shares/use
Knowledge supply: USDA WASDE stories and CME Group closing futures costs
What does this take a look at related years reveal? Of those 12 years, December new crop futures traded decrease in 11 years from early March to early October (92% of years). The exception is 2012, a drought yr. If drought is within the playing cards for 2021, costs will commerce greater. Taking a look at all 31 years from 1990-2020, new crop futures declined in 22 years, or 71%. How can we clarify a higher tendency for decrease costs in years when shares are projected to be tight?
In lots of of these years, costs had been already elevated early within the yr, anticipating a slender steadiness between provide and demand. Increased costs are inclined to encourage provides (extra planting) and dampen demand. I discovered it attention-grabbing that in 9 of 12 years, the ultimate shares scenario on the finish of the crop yr was not as tight as projected within the February WASDE report. Markets adapt!
Must you begin pricing new crop corn immediately? There may be nothing particular about early March – in some years it paid to be early, however simply as a few years it paid to attend till late spring or early summer season. Attempt to get one thing accomplished within the first half of the yr. If you’re satisfied that this will probably be a drought yr, use put choices.