The fundamentals are playing catch-up to substantiate what the charts were predicting months ago.
It was Jan. 2, 2008 and corn prices began the New Year trading above the previous month’s high. This higher opening created a “Gap” in price between the December high of $4.57 and January’s low of $4.59. A gap is an area where no trading occurs. This “Upside Gap” resulted when $40 billion came pouring into the commodity markets at the beginning of the year. News of an economic slowdown south of the border and the credit crisis, which was brought on by the subprime mortgage fiasco, sent stock market jitters around the world. Nervous investors were switching to a safer haven, and they were not interested in a guaranteed low-interest savings account. These investors were seriously looking for the next big market mover and began diverting investment money from the stock market to the commodity markets. To a speculator, corn is just another commodity similar to crude oil or gold.
There are several different types of gaps, but this particular one is referred to as a “Mid-Point Measuring Gap” as shown in the chart at right. This gap is also known as a “Runaway Gap,” as it appears after a move has begun to accelerate. This is a sure sign of the heightened anxiety and excitement of traders waiting for an opportunity to enter or exit the market, who respond by buying, as the market is getting away from them. This type of gap must appear during a fast advance after prices have cleared away from any congestion, as it did here. This gap can be used to measure the extent of the move, as it appears at approximately the half-way point.
The advance began when the price was $1.86 at the bottom of the corn market in December 2005, and the gap occurred two years later at $4.58 in January 2008. Add the difference in price of $2.72 to the halfway point of $4.58 and you get an objective of $7.30, which was achieved a mere 6 months later, on June 13, 2008.
Farmers who recognized this gap as a “Mid-Point Measuring Gap” were well rewarded for patiently waiting for $7.30 before pricing any of their 2007 corn production.
The fundamentals, such as supply and demand tables, have only recently begun to reflect the shrinking supplies, with USDA currently forecasting U.S. corn ending stocks to be a tight 673 million bushels in 2008-09. By the time you read this, USDA will have released another report on June 30. This comes on the heels of a record 13.074 billion-bushel U.S. corn crop in 2007 and a 2007-08 carryout of 1.433 billion bushels, which fundamentally does not justify $7.30 corn. However, this is a futures market, and it facilitates price discovery very well. $7.30 corn is simply a result of prices having to rally high enough to attract additional acreage and to ration what is left to avoid running out in the next 15 months.
Now that corn prices are in the stratosphere we’re seeing headlines and pictures depicting the flooded corn fields in national magazines and newspapers. This is an excellent illustration of how the “price action brings out the news.”
A similar situation occurred at the top of the corn market in July 1993, when corn was up to its ears in water and the news was extremely bullish, as it always is at the top.
Will this market continue higher? Or will it peak just as it did in 1993? The Mid-Point Measuring Gap on the monthly corn chart indicated prices would rally to $7.30. Farmers would be wise to monitor the charts closely for the next market signal.
— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are intended solely to assist readers with a better understanding of the grain markets. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online at www.ag-chieve.ca or call toll-free 1-888-274-3138. This column appears here compliments of Ag-Chieve.