Last August, I outlined my case for accumulating July 2007 corn futures in anticipation of a major bull move (see Commodities Trends, Fortunes Made: Repeat In The Making?, Aug. 21, 2006):

With 100 ethanol plants either already up and running or close to production and another 35-plus due to come online next year, corn usage for fuel will surge. An average ethanol plant uses 18 million bushels of corn annually. Corn usage for ethanol will grow in 2006 by 300 million bushels versus last year and is projected to rise by more than 500 million bushels in 2007 versus this year. Even if 4 million or 5 million additional acres are planted next year, there’s no way demand won’t exceed supply by a wide margin in 2007.

My rationale had to do with a demand shock to the corn market for the 2006-07 crop year due to accelerating corn demand for new ethanol production.

Let’s first take a look at what's happened since August and then take a fresh look ahead. The question is: Does this corn market have the potential to be a bigger bull than that historic run of a decade ago?

July 2007 Corn

Source: Commodity.com

What actually happened since the August/September lows was in some ways amazing. The market has rallied dramatically--more than $1 a bushel. Because every penny-per-bushel move represents a $50 profit or loss per contract traded, a move of this magnitude is equivalent to $5,000 per contract traded. The initial minimum margin requirement for a corn contract, as established by the Chicago Board of Trade, is only $1,148 per contract. This move is a dramatic percentage gain, and it's taken place in less than four months.

The move has a lot to do with the ethanol story, but there's more to it than that. Export sales of corn are at 12-year highs, 45 percent higher than a year ago. Australia has experienced a major drought; as a result, wheat has rallied and priced itself out of many feeding programs. Cattle, hog and poultry feeders, by necessity, are using more corn. Speaking of cattle, you'd think higher feed prices would have discouraged cattle feeding, but the number of cattle on feed is at its third-highest point in history.

Have high corn prices discouraged new ethanol investment? Apparently not--just a few weeks ago, plans to build a new super ethanol plant in Ohio were announced. High prices obviously haven't curbed export demand.

Argentina recently announced a restriction on corn exports and rumors abound that, due to its own domestic demand dynamics, China may curb exports of corn in the spring. China is significant to this story because it's the second-largest corn exporter after the US. China's turn from exporter to importer was, in great measure, responsible for that historic 1996 market. These are bullish developments leading me to believe that this could be the daddy of all bull corn bull markets.

And take a look at the rally the market enjoyed in October, during the thick of the harvest period. The harvest period is generally a weak period for corn prices because farmers generally sell some of their corn right out of the fields. Even during the historic 1995-96 bull market, corn prices only managed about a 15-cent-per-bushel rally during October 1995 and the market actually moved a few cents lower during November 1995.

This year the market rallied more than 50 cents in October and has thus far tacked on another 40 cents in November. To my knowledge, a harvest-time rally of this magnitude has never happened. This underscores just how bullish the current corn market looks.

© 2006 George Kleinman
Editorial Archive

Can July 2007 corn exceed the all-time high price of $5? Time will tell, but I've recommended that Futures Market Forecaster subscribers maintain their core positions in the corn market. And I'm in the process of identifying selective trades that will allow us to pyramid core corn positions (recommended for purchase last August) with a reasonable projected risk point.

KCI Communications, Inc.
1750 Old Meadow Road, Suite 301
McLean, VA 22101
703-394-4931 phone  703-905-8100 fax Email

Risk Disclaimer

Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.