Tuesday, July 17, 2012

Corn: "Short Crops Have Long Tails"

Front futures are off a penny at $7.715 with both wheat and beans down around a nickel.
The grains, more than the other ag commodities and much more than other speculations  have a "Calendar Memory".
I've never been able to profit off mechanistic calendar trades but then again I couldn't figure out how to make money on William Herschel's and and William Stanley Jevons' sunspot observations.
From Black Sea Grain: 
US. Expected Price Pattern for Corn and Soybeans
Widespread drought conditions continue to reduce the 2012 US corn and soybean yield potential. Yields are now expected to be well below trend value so that this year's production will qualify as "short crops", writes Darrel Good.

It is widely anticipated that corn and soybean prices will reach a peak early, sometime in a relatively wide window around harvest time, and then decline as the marketing year progresses. The anticipated pattern is generally described by the adage that "short crops have long tails." The logic of this expected price pattern is based on three tenets. First, prices need to move sharply higher in a relatively short time frame so that consumption becomes unprofitable to some end users and the overall pace of consumption is reduced to be in line with expected supplies. Second, a short crop is expected to be followed by much larger production in the following year as weather conditions return to normal and producers respond to the incentives of high prices. Third, once prices peak and start to move lower, an extended period of declining prices is required in order to re-build the pace of consumption to the level of subsequent production. The timing and magnitude of the price peak and the speed and magnitude of the subsequent price decline are determined by the magnitude of the production shortfall, the timing of the recognition of the shortfall, the strength of demand for the crops, and the production response (domestic and foreign) in the following year.

There is not a universally accepted definition of a short crop, but it is generally defined in terms of an US average yield that falls below trend value by some threshold double-digit per centage. For corn, there have been 10 other years since 1970 in which the crop could be classified as short. These include 1970, 1974, 1980, 1983, 1988, 1991, 1993, 1995, 2002, and 2011. The price pattern in those years generally followed the expected pattern described earlier, but with some exceptions. In particular, the timing of the price peak varied considerably in those years. The price peak occurred early in six of those years (1970, 1974, 1980, 1983, 1988, and 2002), but ranged in timing from June to November. Prices did not peak in the same month in any two of those six years. In addition, the price peak occurred in January following the 1993 harvest and in July following the 1995 harvest. For the 1991 and 2011 crops, the price peaked in August before harvest and again later in the marketing year....MORE