Something Big is Coming

How things change.  A year ago the Midwest and Mississippi Basin were suffering the worst drought since 1956.  Corn stalks were rapidly going brown and corn prices were rapidly going up.  The next food crisis was imminent.

We even wrote an article on how to capitalize on it.  What do we know?

Today the exact opposite is happening.  Mother earth is yielding an abundance of corn and corn prices are sagging like a half empty flour sack.  A complete reversal has occurred.

“The 2013 corn crop is expected to come in at a record 13.8 billion bushels, up 28 percent from last year,” explains Reuters.  “If that happens, supplies will build to an eight-year high, making the famine-to-feast reversal the largest annual swing in more than half a century.”

The price action is obvious.  Corn prices have fallen from $7 a bushel a year ago to about $4.80 today.  What’s more, corn prices are expected to fall even more…

Blame It On the Rain

According to Jay O’Neil, senior agricultural economist at Kansas State University, “As the crop is harvested in September and October, prices are expected to fall to around US$4.30 a bushel, a level not seen in the last three years.”  On top of that, not only has the price of corn reversed course, the Mississippi River’s reversed course too…

Naturally, we don’t mean the flow of water has reversed course.  That would be impossible.  Nonetheless, the flow of corn has reversed.  Barges loaded with corn are heading north from the Mississippi Basin to the Midwest.  From what we gather, this almost never happens…

“What’s really changing here is the flow of corn,” said Brent Baker, a vice president for John Stewart & Associates, a trading firm.  “This is unprecedented.”

So what’s going on?  Why is corn flowing north into corn country?  Shouldn’t it be flowing south to export markets?

If you can believe it, you can blame this unnatural occurrence on the rain…

That’s right.  Despite the pending bumper crop, the wet spring delayed planting in the Midwest resulting in a delayed harvest.  Farmers in the Midwest will not be ready to harvest until early October, several weeks later than usual.

Thus, the corn from Louisiana and Arkansas, which is already being harvested, is flowing up river towards Midwest ethanol producers.  Moreover, until Midwest corn is harvested in early October, Midwest ethanol producers will continue to fill their demand with southern corn.

“As fast as you can move it from the south to the north, we’re shipping it north,” said Ryan McClanahan, a merchandiser for Commodity Specialists Company, a grain trading and marketing company.  “It’s the big thing right now.”

What’s the point?

Something Big is Coming

The point is.  The world is a highly unpredictable place.  Things that seem certain are revealed to be uncertain time and time again.  In a year of record corn yields, Midwest ethanol producers must import corn from the south to meet their demand.  Who would have guessed that?

Connecting the dots and drawing the logical conclusions have been shown to be utterly wrong.  Surprisingly, linear thinking is often wrong.  That’s because things are hardly linear.  Nor are they predictable.

But where markets – or the weather – are concerned they have the appearance of being almost predictable.  Just look at a wave pattern of the S&P 500’s price movement over time.  Timing the bottoms and calling the tops appears so easy.  But try to do it with skin in the game, real time, and you’ll quickly earn your scrapes and modesty.  What we are getting at is this…

Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas?

Most of the time, no.  But occasionally, yes.  The yield on 10 year U.S. Treasuries is up nearly 120 basis points since early May.  What will happen when the yield tops 3 percent?

No doubt, something big is coming.  You can almost feel it.

Sincerely,

MN Gordon
for Economic Prism

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