Last year´s volatile corn market

Dec 30, 2011
by DTN

You might feel as if you have whiplash, almost as if someone else spent their year yanking you back and forth. It’s been an unprecedented year for grain markets with many daily moves dictated by headlines from Europe rather than news from the Corn Belt. But then again, Mother Nature played her tricks, too, at one point fueling speculation and bringing the nearby July corn contract within one tick of $8.

Have outside markets ever had this much pull? Not to this degree, DTN Senior Analyst Darin Newsom said. “There have been times when the outside markets played key roles at certain times of the year, but to move the market up one day and down the next, that isn’t typical. Corn goes up 10 to 15 cents one day and down 15 to 20 cents the next all because of headlines out of Europe. There’s not a 40-cent change in the fundamentals overnight. It all has to do with the headlines.”

Blame the European debt crisis, which saw Greece nearly default on its debt obligations, Italian and Spanish bond ratings get trashed, and spawned negotiations that moved worldwide markets based on whether the news portrayed that day as productive or contentious. The U.S. dollar index rallied and the euro sank to new 2011 lows as concerns grew. “This has moved international money to the U.S. dollar index despite a lack of movement by the Fed in regards to the Fed Fund rate,” Newsom said. When the dollar’s up, it tends to push commodity prices lower.

Blame Congress, which in its impasse over increasing the debt ceiling demolished fledgling belief that our country’s economy was on the mend and created an aura of uncertainty around the economy. Ratings firms cited Congress’ inability to compromise as a factor in their threats to downgrade the country’s credit rating late this summer.

Blame China for its fickleness about its needs. With the Chinese back in the corn market, news of purchases fueled rallies, and fears of canceled shipments during corn’s price run-up added pressure.

Blame headlines. The 24-hour news cycle and daily bullish or bearish headlines kept traders— and their algorithms—moving in and out of markets.

When the rest of the world looked risky, traders put their money in commodities.

In corn, the investment traders, hedge funds and other speculators started cutting back on their long position in February but rebuilt it as a flash drought stressed crops in the heart of the Corn Belt. The extreme heat and months without rain threatened to reduce yields, and questions about acres lost to flooding fueled the market’s rally to its all-time high, $7.9975.

“It’s an interesting place to stop because you have to wonder: How many orders were there to cover or sell at that nice round $8 number? We’ll never know,” Newsom said.

Noncommercials were right there with it, but soon determined corn was overpriced. Since late August, they’ve reduced their netlong positions to 142,000 contracts. In February, their position peaked at 498,000 contracts, followed by peaks in April at 473,000 and September at 392,000.

At the same time, the weekly close in the nearby futures contract has dropped from $7.87 in early June to $5.825 in late November.

In the midst of the price fall, Mother Nature yielded the stage to Europeans. For the most part, the grains markets have stabilized, Newsom said. Noncommercial traders are substantially less invested in commodities at the close of 2011 than they were throughout the year, but buying opportunities could bring them back next year, Newsom said. We’ll just have to wait and see if headline fever subsides or if it drags commodities around the stage for a second act in 2012. — Katie Micik, DTN