NEW ORLEANS — Though economic fundamentals don’t support a sharp surge in commodity crop prices, that doesn’t mean the outlook for U.S. farmers is entirely pessimistic, according to a market analyst.
Farmers in the coming year may be able to take advantage of swings in the commodity crop market due to “irrational” shifts that are divorced from actual supply and demand over the long term, said Todd Hultman, grain market analyst with the DTN information service.
“When it comes down to it, markets are people. Prices don’t come from a textbook or mathematical models, they come from people,” Hultman said at the American Farm Bureau Federation’s annual convention in New Orleans on Jan. 13.
Corn’s price is highly correlated with other crops, such as soybeans and wheat, but it also tends to track other commodities, such as gold, copper and crude oil, Hultman said.
Volatile swings in these markets can be triggered by perceptions that don’t directly relate to market fundamentals, he said. For example, corn prices dropped from roughly $8 to $3 per bushel during the 2008 financial crisis without dramatic changes in yield or inventory.
Mere fears of a drought or another weather event can affect this “big interconnected haggling process” enough to have a significant financial impact on farmers, Hultman said. “It doesn’t take a lot to move a market.”
That’s likely to be particularly true in 2019, since inventory levels of corn are expected to be in a range that’s associated with wide price fluctuations, he said.
Current projections anticipate “ending stocks” of corn will represent about 14 percent of corn usage in 2019, Hultman said.
When the ratio of ending stocks to usage is below 7 percent, it signals a “bull market” for corn prices, but if it’s above 16 percent, it signals a “bear market,” he said.
When the ratio falls between those two benchmarks, however, corn prices tend to be less predictably associated with supply and demand, he said. “It’s not as well defined as we think it is.”
In light of uncertainties such as Chinese tariffs on U.S. farm exports, Hultman said the price of corn next year could fall between $2.80 and $3.80 per bushel.
“In times of surplus, these irrational rallies are the best opportunities to shoot for,” he said.