Speculations, Bubbles and Corn Price

The spot price obviously doesn’t always match with future price, particularly in price of corn. During summer cycle the data in future market of corn prices are volatile, principally because the future prices is sensible supply expectations, and given that supply is relate to climate conditions, the market develop into a weather market: with a behavior very erratic. Eventually the market future prices become less speculative because the corn output is more predictable (we know with more certainty corn yields in September than June; because there are more information about climate damage or goodness), causing that prices in future contracts and spot prices are more related than previous periods.

In the current period, it’s possible relate the eased in future price in corn contracts with less speculative positions by investments funds in this market as consequence of a co-movement associated to oil market (some say it is out of any rationality investments). But we can also relate it to fundamental factors, principally unexpected supply positive shocks in recent weeks: the wet weather associated with secondary effects of hurricane Gustave, causing exceptionally positive rains in the “corn belt” of United States.

However, in the next quarter of the year we can’t only associate the easing of future corn price by the correction of irrational positions of financial intermediaries (bursting the bubble) or as result of narrowing the credit by central bank actions. I think there are also real factors that would give support to the current still high prices (in fact the markets think in this way) and supported expectations of high prices in recent periods (historical low levels in corn inventories). And at the end of the day, inventories, demand and supply conditions will be matter most.

In fact, the total funds invested in commodity markets reached $400bn at the end of the first quarter of 2008 (including all commodities such as Oil, Copper, Gold, Wheat, Corn and Zinc); the market value in one market, the biggest, The New York Stock Exchange reached $25 trills in 2006, 62 times larger than commodity markets; and the value of international bond market; reached in 2006 a value estimated in $45 trillion, more than 100 times all commodity markets; this is the reason why small movements, small influx from this market during the weather market period can affect the valuation of future prices. However, the spot price is determinate by fundamental factors as we’ll see in the coming months.

The graphs added invite us to infer about the outlook in corn market, now when the market will face the facts directly during harvest period in the last quarter of the year.