A long time ago in a galaxy far, far away I studied to be a lawyer. One of the books for required reading was “The Brethren: Inside the Supreme Court” by Bob Woodward (of Watergate fame) and Scott Armstrong. This book pulled the curtain back on some of the mystique of the US Supreme Court, giving us a look at what went on behind the scenes. Released in 1979, the book covered the years 1969 to 1975, a time when a number of social issues were brought before the Court. The growing US pornography industry was one of those issues, and as one memorable story goes, in regard to how justices decided if material was obscene or pornographic, Justice Potter Stewart was quoted as saying, “I know it (obscenity, pornography) when I see it.”

What could this possibly have to do with the commodity complex in general, corn in particular? One of the most frequently asked questions these days is “When will the corn (soybean, crude oil, cattle, insert market here) market top?” I know there are a lot of folks in the industry pretending to know by projecting prices that should be, could be, the top in the market(s). But again, as is so often the case, it comes down to reality versus imagination. While it is easy to make up guesses, the reality is there’s no way of knowing when any of these fundamentally bullish commodity markets will top.

Look at WTI crude oil, with the inverse (backwardation) of its forward curve steepening despite the spot-month contract easily moving through $90. Will it stop at $94, $100, $150, etc.? Sure, but we don’t know when or what price. Simple economics tells us there is a tipping point where high prices start slowing demand. But the crude oil market isn’t there yet.

Malaysian palm oil is another market that has been getting a lot of press of late as the nearby futures contract has basically tripled in price since its low in May 2020. As with so many other key commodity markets, palm oil’s forward curve is inverted and showing no sign of slowing. At first glance palm oil’s chart looks similar to what we’ve seen in lumber, copper, and countless other markets over the last couple years. Traders who are new to the world of commodities must think every market is always inverted, supplies of everything are always tight. Those of us who have been around long enough to remember Chicago (SRW) and Kansas City (HRW) spreads running at more than 100% full commercial carry, giving rise to the still silly Variable Storage Rate solution, know tight supply and demand reflected by inverted forward curves is indeed not the norm.

Back to the original question: When will the corn market top? The most recent CFTC Commitments of Traders report (legacy, futures only) showed noncommercial traders adding more than 16,000 contracts to their net-long futures position, pushing it back to 455,000 contracts with its sights set beyond 460,000 contracts at Tuesday’s close (Possibly, with the data for the next round of reports pulled at the settlement). On the other hand, the rally in corn futures has put pressure on the basis market, with the cmdty National Corn Basis Index (NCBI, weighted national average) continuing its winter slide. Where are these bushels coming from? For what it’s worth (admittedly it’s not much) USDA’s December 1 Quarterly Stocks report pegged US corn stocks on hand at 11.65 bb, the highest December 1 stocks number since 2018’s 11.94 bb. Again, I don’t necessarily believe the number was that big, based on what futures spreads have been showing us for months, but there was at least some bushels in storage that have been working into the market of late.

Despite the recent weakening, the NCBI is still relatively strong. Last Friday’s calculation came in at 15.0 cents under March futures as compared to the previous 5-year high weekly close of 12.4 cents under and the previous 5-year average weekly close of 28.9 cents under. This tells us short-term supply and demand is still bullish. At the same time futures spreads are either showing a weak carry or an inverse as far out as one cares to look, meaning the long-term fundamental view remains bullish as well.

For the corn market to top, these key fundamental reads will need to change, the market price has to reach a tipping point where demand starts to shut down. Back in 2012 this happened when futures climbed above $8.00. The market didn’t stop until futures fell back to roughly $3.00 during the fall of 2016. As of now the market doesn’t look to be near such a tipping point, though I still see a major (long-term) top in the cash market completed last May. This means we need to watch the market closely for signs of a change in our key fundamental reads.

And when these changes start to occur, I’ll know it when I see it.

Until next time,

Darin Newsom