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One Big Bull


In the words of the great Yogi Berra, “It’s déjà vu all over again” – the current bull market looks more and more like the run-up of 2007-2008. It’s a good time to review the record of bull markets and look for the factors that could bring it to an end.

While the definition of a bull market is hazy, I know one when I see it. Over the past three decades, I can think of six good examples of bull markets in corn and soybeans: 1983, 1988, 1995-1996, 2003-2004, 2007-2008 and the current market. What drove the bull? Was it a supply-driven or demand-driven market?

1983: This was a classic supply-driven bull market, with prices responding to a hot and dry July in the Corn Belt. Corn yields were well below trend, and new-crop futures rose $1/bu., or 36%, from June to August. In response to higher prices, feed demand took a hit. Here’s a fun fact: The nascent ethanol industry consumed all of 160 million bushels that year, or a little bit less than the industry currently consumes in two weeks.

1988: This was our last true “butt-kicking” drought, with corn yields about 25% below trend. Unlike 1983, crop damage occurred earlier with hot and dry weather in May and June. Prices rose about $1.40/bu., or 65%, from mid-March to the early peak in late June. Like 1983, total demand fell despite higher exports as feed demand declined.

Both of these markets displayed the classic “long-tail” of supply-driven bull markets – it took about one year for prices to slowly drift back toward pre-drought levels.

1995-1996: A small corn crop set the stage for a supply-driven market, but demand quickly seized the wheel as corn exports, particularly to China, soared. The July 1996 corn contract doubled in 15 months, from $2.75 in April 1995 to nearly $5.50/bu., one week from expiration. (Note the long and steady price rise of a demand-driven market vs. the two-month-long spikes of 1983 and 1988.) Unlike 1983 and 1988, our country was not sitting on large corn stocks going into the 1995 crop, and the resulting small carryout led to an unprecedented old-crop/new-crop inverse and the hedge-to-arrive debacle of 1996.

2003-2004: Soybeans ignited the rally when the Corn Belt turned dry in August, but solid export demand for wheat and corn sustained the rally into spring 2004. Soybean prices doubled while corn and wheat prices rose about 50%. Corn used in ethanol production topped 1 billion bushels for the first time.

2007-2008: What can I say about this bull market that has not already been said? Wheat led the charge as four out of five major world exporters had substandard crops. Add to that a mania in the construction of ethanol plants and a worldwide surge in all commodity prices. The results were stunning; wheat, corn and soybean prices reached heights never seen before.

2010-2011: Wheat leads again as planting delays in Canada and a Russian drought set the bulls running. Add a modestly disappointing U.S. corn yield, strong soybean exports and an ethanol industry trying to prove that trees can indeed grow to the sky and, well, déjà vu all over again.

When will it end? My eye is on ethanol demand for corn. Declining feed demand shows that the livestock industry is suffering – dairy producers are on their knees. But ethanol demand continues to grow (see chart). For the current crop year, USDA has already raised its estimate of corn used in ethanol production three times in eight months.

This is now a demand-driven market, and the driver is not exports, cows or cattle – energy prices are driving this market. Put down the WASDE report and go talk to an oil analyst.

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