Classical-music composers sometimes riff off a melody by another composer, like Brahms' Variations on a Theme by Haydn or Rachmaninoff's Rhapsody on a Theme by Paganini. In a similar vein, you can think of this post as Lehner's Variations on a Theme by Hultman.
Todd Hultman, DTN's lead analyst, laid out the theme in question in his Dec. 6 post, "A Hunch About This Market Cycle" and elaborated on it a few days later at the DTN Ag Summit in Chicago. (https://www.dtnpf.com/…)The theme goes like this: For eight or nine years, ag commodity prices have stagnated while equities have soared, leaving the relationship between the two out of balance. The last time something like this happened, a correction followed -- and eventually ag commodities recovered. If history repeats itself, another correction could be on the way. In short, corn growers, there's reason for hope.
The accompanying chart tells the theme's story. The chart plots the relationship over the last 25 years between the Dow Jones Industrial Average and the DTN National Corn Index. (The NCI takes the bids from DTN's daily calls to thousands of grain elevators and averages them into a national cash corn price.) From 1995, when the Dow fetched 1,000 times cash corn, it rose during the internet bubble to nearly 6,000 times the NCI in 2000. Then the tech bubble burst, and over the next 12 years the ratio fell until at its nadir in 2011 stocks sold at only 1,500 times corn.
In 2012, the cycle seemed to start over again. The ratio turned and headed north. Today the Dow is close to 7,500 times the NCI. It has risen so high, so fast that it's natural to expect it to turn down again, just as it did in 2000 after a similar explosive run-up.
Of course, it's one thing for the ratio to come down and another for corn prices to go up. As Todd put it on Dec. 6, "Just as corn prices did not jump into a new bull market after making a 12-year low in 2000, I don't expect grains to turn into a bull market in 2020." The ratio turned down in 2000 because stocks swooned. It wasn't until some years later that the ethanol boom drove corn prices higher.
Still, Todd's explanation for the ratio's gyrations offers farmers hope. "Sometimes investors favor financial assets and sometimes they favor physical commodities," he wrote and broadly speaking that's true. When stocks tumble investors adjust their asset allocations, reducing their exposure to equities in favor of bonds, cash and alternative investments, including commodities. Such asset reallocations tend to push commodity prices higher.
How much higher do they push cash corn? That's a good question for a doctoral dissertation; it would take some serious research to answer it. Whatever boost reallocations provide, it may come with a lag. As Todd pointed out, it took corn two years to rise after the 2000 stock-market decline: "Corn prices got temporary help from dry weather in 2002 and more help from increased demand in 2004, but had difficulty sustaining higher levels until the fall of 2006 when the ethanol boom began."
Why the lag? Stock prices reflect investors' assessments of the future earnings power of companies and serve as a rough proxy for the general economy. Corn prices reflect supply and demand for a commodity and serve as a rough proxy for the ag economy, which runs on a very different track from the general economy. Inevitably, the relationship between stock and corn prices is complex. There's a lot about this theme still to be learned.
And yet, intuitively, I'm confident Todd Hultman is onto something. Perhaps it boils down to a belief that prices move in cycles. At some point, something will happen to drive stocks down; at some point, something will happen to drive corn up. Nothing goes up or down forever.
The longer the Dow/NCI ratio rises, the closer it's getting to the turning point. It may not happen this year or next year and it may be driven at first by a decline in stocks rather than an increase in corn. But if you've been wondering whether this era of low corn prices will ever end, the growing imbalance between stock prices and corn prices is a hopeful signal.
Urban Lehner can be reached at email@example.com