Bearishly Bullish On Corn

June 28, 2008's Managing Editor Brad Zigler unearths what the recent Midwest flooding means for crop harvesting, in dollars and cents.
  • Comparing flood years
  • What's the upside?
  • The behavior of wheat


This morning's grain stocks reports from the U.S. Department of Agriculture will be the first to incorporate the effects of the recent torrential rains and flooding in the upper Corn Belt.

Not surprisingly, Shawn Hackett, editor of the Hackett Money Flow Report, figures the estimates will show dramatic reductions from the projections made in last quarter's report. Back in March, the USDA's Prospective Plantings survey indicated farmers intended to plant 86 million acres of corn and 74.8 million acres of soybeans.

The soggy spring made a shambles of those intentions. By Hackett's estimation, actual harvestable acreage usually runs 9% or 10% below intentions. That would put this year's corn production on some 78.8 million acres, and soybeans on 67.7 million acres.

Or would have, had it not been for the deluge. The loss in corn plantings, says Hackett, will likely parallel that following the record 1993 flood year. Then, the corn harvest was off 33% from the previous year, while soybean production tumbled 17%.

Pre-flood corn intentions were already off 8% from 2007 levels, according to the March USDA report, though farmers expected to boost bean acreage by more than 17%.

From the heart of the waterlogged growing belt, Iowa officials say the state's losses may actually exceed the $21 billion in damage suffered in the 1993 flood. Veteran grain traders estimate that 3 million acres of corn still remain under water and that 2 million acres didn't even get planted, all of which translates to a loss of more than 700 million bushels. That's the entire carry-out to the next crop year.

As a result, Hackett figures old crop corn prices, after rising 26% to more than $7.50 a bushel in June, still have some upside. "Putting my fundamentalist hat on," he says, "I find it hard to imagine a meaningful correction until we're past the peak of hurricane season in mid-to-late September."


CBOT Corn (July 2008)

Chart: CBOT Corn (July 2008)



That points to $8-$10 corn, by Hackett's lights. But, he cautions, the endgame is nigh. "I am bearishly bullish," he avers. "I know that prices can see their biggest rise near the end of bull markets before collapsing."

A market that takes on the near-vertical price trajectory of corn over the past month attracts attention by bulls and bears alike, making it a ripe target for swift - and painful - denouement.

"Corn can top anywhere from right now to the end of the year, depending on weather conditions," Hackett opines. "Demand destruction is occurring and it will continue to do so at an increasingly rapid pace."

Hackett grimly draws a parallel from the wheat market, saying, "I believe there is a very good chance corn's run-up will end the same way as wheat's: in a panic-stricken, short-covering, limit-up rally as commercials and end users run out of money to cover margin calls."

Following a tumultuous five-month rally in March, Chicago wheat heeled over into a two-month plunge that only ended after prices fell 42%.


CBOT Wheat (July 2008)

Chart: CBOT Wheat (July 2008)



"I believe that the last part of corn's bull move will have very little to do with weather or supply/demand. It will have to do with money."

Hackett extends his call to the soybean market as well, putting the top anywhere between $15 and $20 a bushel. July beans finished last week better than $15.81, but he claims if there's anything to be learned from the behavior of wheat earlier this year, it's that prices can rise higher and extend themselves longer than many imagine.


CBOT Soybeans (July 2008)


Chart: CBOT Soybeans (July 2008)


In that, he echoes the thinking of economist John Maynard Keynes, who warned: "The market can stay irrational longer than you can remain solvent."



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