Fundamentally Speaking

Joel Karlin
DTN Contributing Analyst

A review of where the March-December corn spread has traded over the past number of years as of February 1indicates that last Friday’s close of $1.44 the highest ever for that date.

A 20-year average of this spread as of February 1 results in March corn having a three cent premium over the new crop December contract.

Looking at past price history, other years where this spread has been deeply inverted is last year at 65 cents, 2011 when it was 70 cents, and back in Feb 1, 1996 when March 1996 corn futures traded 68 cents over the December 1996 contract.

What all these years have in common are extremely tight old crop stocks to use ratios as estimated in the January WASDE report.

All of these four seasons are characterized by production shortfalls the year prior along with market expectations of a huge rebound in output this coming season.

The USDA January 2013 supply-demand estimate of U.S. corn stocks to use ratios came in at 4.4% the lowest ever for that month’s projection.

The lowest other stocks to use ratios over the past 20 years came in the 2012, 2011, and 1996 reports.

These data points are plotted along with others in the accompanying graphic that shows the March-December corn spread in dollars per bushel plotted against the January WADSE estimate of the U.S. corn stocks to use ratio.

The downward sloping line reflects the fact that the larger the stocks to use ratio, the more comfortable are ending stocks allowing the March-December spread to move into a carry where the nearby contract is priced lower than the deferred.

On the other hand, a small stocks to use ratio indicating very tight supplies results in the March contract trading at a premium to December.

This inverted market reflects the high current prices needed to ration demand and the more optimistic view that supplies down the road will be more ample allowing for lower prices.

The r squared at 80% shows a very good converse relation between prices and the stocks to use ratios.

(KA)