Just when you thought that the corn and other grain markets could not go any higher there is a weather shock. Corn is above $7 a bushel on too much rain. Soybeans which are grown in the same region are advancing to the highs.
Weather shocks and the relationship with price is what makes any discussion about a commodity bubble irrelevant. At this point, it is unclear what will be the size of the corn crop so the question of whether prices are too high cannot be answered. The hallmark of the grain markets is that every few year there is a weather spike and a corresponding spike in prices. Unfortunately, a simple review of the long-term price patterns shows that the spike have become more frequent and combine with a structural uptrend in prices. There usually is a season spike in prices which is related to planting and pollination uncertainty, but we are focusing on moves that are more than 20%. The weather spike could come in a number of forms, wet and cold weather in Spring which delays planting; heat during pollination period; heat in later season which stunts growth. The uncertainty comes because the size of the crop cannot be determined with precision like the output from a factory.
Looking at the corn market from 1980 to the present, we can see these "weather" price spikes in the following years:
1983 - major uptrend from Fall 1982
1988 - large summer spike
1990 - one season spike maxing during June
1993 - harvest shortfall decline in 1994; maxing in December
1994 - spike until Spring 1996; This was the previous largest move since 1980.
2000 - one season spike; max in May
2002 - one season spike; max in September
2004 - one season spike; max in May
2005 - one season spike; max in July
2006 - spike with structural uptrend from ethanol; move at end of season
2007 - spike and with continued structural trend
2008 - current spike
The prices will decline as the supply imbalance is eliminated. The data also show that for most of the 1990's the corn market was relatively calm except for the 1996 weather shock. We have been lucky with the weather.
Weather shocks and the relationship with price is what makes any discussion about a commodity bubble irrelevant. At this point, it is unclear what will be the size of the corn crop so the question of whether prices are too high cannot be answered. The hallmark of the grain markets is that every few year there is a weather spike and a corresponding spike in prices. Unfortunately, a simple review of the long-term price patterns shows that the spike have become more frequent and combine with a structural uptrend in prices. There usually is a season spike in prices which is related to planting and pollination uncertainty, but we are focusing on moves that are more than 20%. The weather spike could come in a number of forms, wet and cold weather in Spring which delays planting; heat during pollination period; heat in later season which stunts growth. The uncertainty comes because the size of the crop cannot be determined with precision like the output from a factory.
Looking at the corn market from 1980 to the present, we can see these "weather" price spikes in the following years:
1983 - major uptrend from Fall 1982
1988 - large summer spike
1990 - one season spike maxing during June
1993 - harvest shortfall decline in 1994; maxing in December
1994 - spike until Spring 1996; This was the previous largest move since 1980.
2000 - one season spike; max in May
2002 - one season spike; max in September
2004 - one season spike; max in May
2005 - one season spike; max in July
2006 - spike with structural uptrend from ethanol; move at end of season
2007 - spike and with continued structural trend
2008 - current spike
The prices will decline as the supply imbalance is eliminated. The data also show that for most of the 1990's the corn market was relatively calm except for the 1996 weather shock. We have been lucky with the weather.
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