Record grain prices could occur under the right fundamental climate at any time. Any single factor can cause a historic rally, but in most situations involving record grain prices there may be a combination sequence of events. As a trader, being able to recognize when such potential exists can prevent substantial losses and allow for sizeable profits. Looking at some of the past record setting runs for grain prices may assist you.
When it comes to historic grain prices, we don’t need to venture too far from the present to find them. 2008 was an amazing year for grains and other commodity prices. One of the most publicized price runs was corn’s move to $8/bushel. There were a number of successive fundamental occurrences that contributed to the rise in price. Significant April snow storms at the end of the 2007/08 winter lead to a very late spring. Over this period, corn prices rallied from $3.10/bushel during the 2007 summer to $5.00/bushel. Farmers were forced to delay planting while grounds thawed and dried to workable levels. Mother Nature was in no mood to comply. Heavy spring rains during the planting season caused a lot of destruction to key farmland in the Corn Belt. Iowa, the largest corn producer by state, was hit the worst. They had 1.3 million acres of flooded farmland. By the time farmers were able to sow their crops, some decisions had to be made. A late planting makes crops more susceptible to an early freeze, and 2008 was especially delayed. At the time, input costs of seeds, fertilizer, and fuel were soaring. A crop hit with 30-40% yield declines typically associated with early frosts would be a financial wreck for farmers. Many decided to plant soybeans instead of corn because of the shorter growing season required. The late corn planting and transition of many acres for soybean production was significant enough to push corn to $8/bushel in the summer of 2008.
2008 also saw record grain prices for wheat. A large part of the wheat rally can actually be attributed to corn. Nearly 25% of the U.S. corn crop goes towards the production of ethanol. This brought a whole new sector of demand to the market and a battle for acreage has ensued ever since. Wheat was on the losing side of that fight. Over the past several years, consumption growth has outpaced increases in production. Wheat stocks were drawn on to make up for the gap between supply and demand. Global reserves hit 30 year lows after declining for seven of the last eight years. Using stocks to fill consumption needs is only a temporary fix to a problem of this nature. Depletion of reserves had reached their extent and the result was $13/bushel wheat. Record setting rallies in grain prices have proven to be dramatic. This unique situation was a fantastic opportunity for traders if you were able to get in on the right side of this prior to the onset.
(USDA FAS- World Wheat and Coarse Grains: Supply and Demand)
Trading in futures and options involves a substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
