written 23 November 2019 by Roger Wright
A bull market is a market in which prices are in a distinct uptrend. A bear market is one in which prices are in a distinct downtrend.
There are two types of bull markets: supply and demand bull markets.
Supply bull markets have prices moving higher due to concerns there will be a short supply of a given commodity. Supply bull markets are weather driven and short lived. A supply bull market will last a few to six weeks at the most. The US corn crop is made or lost in July and the soybean crop is made or lost in August.
Demand bull markets are slow to develop and last a long time compared to a supply bull market. A demand bull market is like a battleship. It is slow to get moving, takes a lot of power to build up speed and does not stop quickly nor easily. It is fed by a steady flow of increasing demand for a given commodity. A demand bull market will last three to eight months or even longer. Once “everyone” is convinced prices will continue higher, there is a rush to build inventory and buy futures before prices go even higher.
It takes a lot of negative news to slow down and eventually stop a demand bull market.
In 2019, our chances for a supply driven bull market were over with that November 2019 Crop Production Report. We now need to wait until bad weather in South America or the US next spring or summer fuels another supply bull market or search for clues for a demand bull market developing this winter.
On May 13th, 2019, December 2019 corn made a new contract low at $3.63¾ because “rain makes grain” and it sure was raining! Before the 13th, the market was not concerned that farmers would not get corn planted. The market knew most of the corn could be planted in less than a week and May was not even half over. However, by the middle of May 2019, the market realized the soil was so wet, very little corn would be planted the third week in May and the weather forecast for the fourth week of May generally was calling for much above normal rainfall.
In 1993, December corn made its low on June 14th because of the “rain makes grain” mentality too. The corn did not get planted and the prices rallied into January 1994. The speculative traders who blindly sold corn in the spring of 1993 because “rain makes grain” got their heads cut-off because rain will not make grain if the crops do not get planted!
In 2019, the market remembered the lesson learned in 1993, namely crops must get planted to make grain and that is why the low in 2019 was made a month earlier than it was 1993. From the 2019 May 13th low, corn rallied $1.10 (30%) in just 35 days! In 1993, corn futures rallied 79 cents (34%) from the contract low to the high, but it took seven months! The futures rally in both years was a supply driven bull market, but the 1993 bull market was the slowest supply driven bull market in history because the market was so slow to give-up on the “rain makes grain” mentality. Until the USDA progressively confirmed the lower corn production in its monthly crop production reports in 1993, the futures market just did not give-up on the “rain makes grain” philosophy.
That was not the problem in 2019. The market concluded in May and the first half of June, the 2019 corn crop was going to be small and the supply driven bull market was a 35 day race to the top. December corn at $4.73 in the middle of June 2019 convinced farmers to keep planting corn into the third and even fourth week of June. Unfortunately for the price of corn, that 33% of the 2019 crop planted in June yielded better than anyone expected and USDA production reports were bearish the rest of the year. December corn made a new contract low of $3.52¾ on the 9th of September. That was just ten cents higher than the contract low made September 18th the previous year. Truly amazing!
All through the summer of 2019, I expected the USDA to reduce yields and harvested acres. USDA has reduced corn yields to about 8 bushels less than average, I was expecting 15 to 30 bushels less than average. After all, a third of the 2019 corn crop was planted in June. All my life, researchers have said corn planted after May 10th loses one bushel of yield each day and 2½ bushels each day after a June 1st planting date. We all learned weather can make a huge difference on yields. I saw 300 acres of corn planted on June 4th and 5th 25 years ago make 204 bushels in a field that had never yielded 200 bushels. But, I reasoned that the third of the corn crop planted in June and 12% planted after June 14th could not have possibly been fortunate enough to have such unusually great weather all across the Corn Belt. We will find out in January when I am sure at least harvested acres will be reduced and probably yields a little bit, but certainly not more than 1 to 4 bushels less corn and a half to 2 bushels on beans.
After trading to $4.02 on October 14th, December 2019 corn traded down to $3.65¾ on the 20th of November. At the time, it looked like a new contract lows would be made. China trade talks were going nowhere, soybean prices fell 45 cents to below $9.00, the dollar was stronger and corn exports were still 62% under a year ago. In September, ethanol inventory reached an all-time high even as ethanol production was running 9% less than year ago. Weekly export sales and shipments of US corn were consistently in the 200,000 to 400,000 mt range, way less than the 1.2 million to 1.6 million mt per week we were exporting a year ago.
In hindsight, that $1.10 rally that peaked in June was the worst thing that could have happened to a corn producer. Probably 10 to 15 million more acres of corn were planted than otherwise would have been planted if December corn had stayed in the $4.00 area. That rally to $4.73 coupled with the massive number of imagined acres not planted to corn and the imagined yield loss really hurt demand, especially the ethanol and export markets. High water on the rivers made it very expensive to impossible to get corn to the Gulf to meet the export demand that we had in the late spring and buyers went to other countries and did not come back until a few buyers began to return to US corn in November.
I have always said the best cure for low prices is low prices. When the price is below the cost of production, less product is produced and more product is consumed. Likewise, the best cure for high prices is high prices. More product is produced and less is consumed. However, with the unexpectedly high yields of the 2019 corn and beans, record large Brazilian corn crop and their record large corn exports in 2019, the strong dollar, bearish news on the ethanol side or the corn market, the only bright spot was the feed demand for corn and bean meal. Unfortunately, we were only reminded about great feed demand four times a year with the Quarterly Grain Stocks Report whereas every week were reminded of the very poor corn for ethanol demand and poor exports.
Two weeks ago (November 2019), I gave up on corn futures rally until at least the second week in January and then only briefly.
However, several things have happened the past two weeks that swayed me back to bull side of the corn market:
Ethanol production up eight consecutive weeks.
Ethanol inventory at a three-year low. It was an all-time high six weeks ago.
Corn exports sales & shipments are still poor, but three times more than a month ago.
Corn futures have stopped going down even though soybeans continue to slide lower.
US corn is now $2 per mt cheaper than Brazilian corn and Argentina is sold out.
The seven corn exporting nations shipped 27.92 million mt of corn since October 1st, that is 6.3% more tonnage than a year ago. The seven exporting countries are the US, Brazil, Argentina, Ukraine, Russia, EU, and South Africa.
We already know Brazil’s second crop of corn will be 10 to 15 million mt smaller than a year ago because their beans got planted late and bean harvest will be late, delaying corn planting into late February. They will not plant corn after the first of March because the dry season starts in June.
And the big spec funds are short more contracts of corn than they have been since the third week in September, the week the contract low was made and December corn is 15 cents higher today than it was then! All 159,842 of those short (sold) contracts will have to be liquidated (bought) before the big specs can get net long.
The battleship named “Corn Demand” is underway. It will take many months to get up to speed, but it will reach top speed some time in 2020, probably in the spring.
June 2022 Update.
The Price Graph of a Demand Bull Market
The Price Graph of a Supply Bull Market
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