Those of you who trade corn futures are well aware the corn market was locked limit down on Friday. This means there were thousands of contracts offered for sale at the 20-cent limit down price with no takers.

The Chicago Board of Trade rules state the daily corn price move is limited to 20 cents per bushel above or below the previous day’s close in one session, however limit moves are rare. It was virtually impossible to sell corn futures through the July 2008 contract on Friday.

Corn also trades (usually on a limited basis) on Sunday evening; as of this writing, the 2007 contracts are all offered limit down once again with no takers. This is literally a 1929-style panic situation in the corn market.

The news was a shocking crop report, released Friday morning before the market opened, that indicated US farmers intend to plant 90 million acres of corn this year. This number is the largest since 1944, up 12 million acres versus last year and about 2 million to 3 million more than most people in the trade had estimated.

Looking at this market logically, this move appears to be a gross overreaction. First of all, this is intended acreage only; the crop hasn't been made yet, let alone planted, and there's a lot of weather ahead of us.

Second, this report isn't always accurate. Here's what Mary Cashman, editor of Global Commodity Intelligence, has to say about this report:

How accurate is the USDA Prospective Plantings report? It comes from a survey of producers' 2007 planting intentions that was taken in the first two weeks of March. In the past 20 years, the March survey missed the actual corn planting by an average of 1.1 million acres with the biggest error at 3.8 million acres. Fully, 70% of the time, the survey overestimated the actual corn planting. Given the big jump in corn acres that is expected this year, the variance between the survey and actual plantings is likely to be larger than usual. If corn prices continue to drop, it must be considered that growers will re-think their original intentions. If corn prices continue to drop but beans can maintain or even rise--in a bid to buy acreage--intentions could change rather radically.

Third, sharply lower prices will do nothing to ration demand. Lower prices will stimulate exports (already very strong); plus ethanol producers and other corn users have no incentive not to use as much corn as they planned to previously.

Ethanol demand is continuing to grow and will potentially exceed 3 billion bushels in the coming year. However, the markets aren't always logical. They can be overextended by money flows in the short run. As I mentioned before, this isn't logical; it's a panic-type situation.

Over the weekend, I asked myself what could the worst-case scenario be here? Markets can overreact, but what would a historically extreme overreaction look like?

Realizing no market is exactly the same, and in an effort to help myself sort out this situation, I looked for the worst price breaks--both in dollar terms and percentage terms--in the past 40 years. This is what I came up with.

First, let’s look at a chart of the current collapse.

July 2007 Corn



Source: Commodity.com

As we go to press (including the limit down Sunday night move), July corn has collapsed 94 cents per bushel from the top, a move of just more than 20 percent off the highs registered slightly more than a month ago. How does this compare to previous collapses off of bull runs?

The daddy of all bull corn markets was the 1996 run, when corn peaked at $5.50 per bushel, the all-time high. Prior to the highs made that July, there was a major correction in May--84 cents, or 16.4 percent. That correction, although no doubt tough to ride through the thick of that battle, turned out to be a buying opportunity.

This correction has already exceeded that one both in dollar and percentage terms.

July 1996 Corn



Source: Commodity.com

The worst correction this decade took place during July 2004--88 cents. This was less than the current break in dollar terms but higher in percentage terms--27 percent off the top.

July 2004 Corn



Source: Commodity.com

Going way back to the 1970s and '80s, the worst all-time corrections I found were as follows:

December 1973 Corn



Source: Commodity.com

December 1974 Corn



Source: Commodity.com

December 1988 Corn



Source: Commodity.com

The reasons for the corn rallies varied from corn blight to the famous ‘Russian grain steal’ to heat and drought. The price breaks ran the gamut from governmental policy to rain and bird flu. This current correction is already the second worst I found since 1988. The all-time worst correction ranged from 27 percent in 2004 to 34 percent in 1973.

Because of the new demand from the ethanol industry, it's hard to believe this correction could turn into one of the worst, particularly because this virtual monster of a crop hasn't been made.

Over the weekend, flooding in Argentina wiped out a portion of the country's corn crop and cold, wet weather in the Midwestern US is delaying the start of planting. However, this is a money panic; if it feeds on itself, I imagine it could potentially go farther than anyone imagines. If it goes farther and deeper than economically justified, then the subsequent rally will be even greater because low prices do nothing to ration demand.

How bad could it be? If there's a 26 to 27 percent correction (like 1988 and 2004), this would mean an additional 30 cents lower, the equivalent of another $1,500 per contract over and above what's already occurred. If the correction equals the worst ever (again, hard to fathom) and it does correct 34 percent from the top, July corn will be trading all the way down to $3 per bushel, or an additional $3,200 per contract traded.

If you're short this market, congratulations, you’re making a killing. My advice to you is to protect your profits. If you're out of this market, there's an excellent opportunity to set up to make a potentially very profitable purchase when the market appears to stabilize and trade once again.

The dilemma comes if you are in the market on the long side (which is my personal situation right now). When the market allows the longs to get out, it will likely be a low point and a time to be buying, not selling. If the market doesn't allow the opportunity for a long to sell, the investor would, of course, rather be out.

Those with deep enough pockets and the will to gut it out can still prosper in the long run. The trick is to be careful to trade within your means and not get swept up in the panic.

George Kleinman is editor of Commodities Trends.

© 2007 George Kleinman
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