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Corn+Soybean Digest

Have the Rules Changed?


Did somebody change the rules? Look, for example, at corn and soybean prices. Since when do bull markets last a year? And since when do two incredibly strong bull markets repeat just three years apart, as they did in 2007-2008 and 2010-2011? I think somebody is messing with the rules.

Consider general price levels for corn and soybeans. Has the paradigm shifted – are higher price levels here to stay? Professors Scott Irwin and Darrel Good of the University of Illinois have looked at the evidence ( and think it is so. These are smart guys and they’ll get no argument from me – the rules concerning what makes a “high” or “low” price have changed.

Then again, let’s not confuse an upward shift in price levels with the idea of a permanent bull market. Prices can and will trade lower, even if a low price such as $4/bu. corn is the high price you dreamed of just a decade ago. Just to keep you grounded, let me remind you of another rule change; your production costs have more than doubled in the last seven years.

Here’s a rule change that snuck by in the latest bull market: Margins in the grain business have increased. A few months back, I took a question from a reporter concerning high profits at a particular grain-handling and processing firm. I told him to look at the higher reported profits at all grain-handling firms.

Volatility is another word for opportunity, and with greater volatility comes more opportunities for profit. It wasn’t long ago that your local elevator was fighting to gross 10¢/bu. Those days are over.

What drives the demand for corn prices? Corn is a feedgrain for animals, so according to the rules, it must be about the number of cattle and hogs, poultry and level of milk production. Yes, animal numbers are still important but the rules have changed.

Look at the July WASDE report. For the 2011-2012 crop year, USDA is projecting more bushels of corn in the production of ethanol than used for feed. This does not include another 1.5 billion bushels used in the production of corn sweeteners. Industrial demand for corn, led by ethanol, is the new driver.

What does this mean? I conducted a simple test, trying to find a positive correlation between gasoline and corn futures prices (December contracts) in 1991, 2001 and 2011. In 1991, there was a very small and negative correlation. By 2001, the correlation has turned positive but remained very small. Today there is a solid positive relationship between gasoline and corn futures prices. The demand bus for corn runs on E-85.

With so many changes afoot, it’s tempting to throw out the rules for marketing. For example, treating spring as a special time of year for old-crop and new-crop sales is surely dated.

Think again. Seasonal price tendencies are rooted in the production cycle for grains. Unless we start planting in January and harvesting in May, seasonal price tendencies – higher prices in the spring and lower prices at harvest – will remain the same. The first rule of marketing also remains unchanged: You need a marketing plan.

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