Todd's Take

A Hunch About This Market Cycle

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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In addition to the usual supply and demand factors that affect grain prices, there is a behavior cycle among investors that sometimes favors financial assets and physical assets, including grains. The tendency of investors to bid stock prices to record highs in 2019, while numerous crop prices are trading at multi-year lows, is eerily reminiscent of markets in 2000. (DTN ProphetX chart)

It was a privilege to speak to the members at the Arkansas Farm Bureau convention Wednesday (12/4/19) and I had to admit from the outset that there is simply no good way to spin the big crop surpluses and low crop prices at the end of 2019. It's a tough grain market every way we look at it.

USDA's ending corn stocks estimate of 1.91 billion bushels (bb) is debatable with crops at risk in the field, but add to it ending wheat stocks near 1 bb, ending cotton stocks near their highest in 11 years and U.S. soybean demand bottled up in a tariff dispute.

On one hand, the smaller corn and soybean crops of 2019 helped contain this year's surpluses, but those surpluses have not gone away. Six consecutive years of good growing weather before 2019, while the world economy struggles to bounce back from the financial meltdown of 2008-09, have resulted in a chronic oversupply that continues to pressure prices today.

Just how bearish is the current era of grain prices? It's been three years since spot corn prices tested 13-year lows near $3.00, but at $3.65, December prices aren't too far away. Spot soybeans tested 11-year lows in May. Spot KC wheat is near 13-year lows and spot cotton tested 9-year lows in August.

As you might imagine, it is not often that crops trade at lows this deep into their history. When they do, there is often another bearish factor at work that doesn't get much attention.

In addition to the usual supply and demand factors that affect grain prices, there is also a behavioral cycle among investors to consider. Sometimes investors favor financial assets and sometimes they favor physical commodities. As the pendulum swings, the investor bandwagon has a knack for taking things too far.

The last time we saw big crop surpluses, slow world demand and grain prices at multi-year lows was 1998 to early 2006. In the summer of 1997, a financial crisis erupted in Thailand and quickly spread throughout Southeast Asia.

Many of the best U.S. ag customers were affected by the crisis -- Malaysia, Philippines, Indonesia, South Korea and others. It was a difficult period for U.S. grain demand and surpluses were made larger by a stretch of good crop weather here in the U.S.

For spot corn, the trough came in the summer of 2000 when prices hit $1.74, the lowest price in over 12 years. While U.S. agriculture was suffering, Wall Street was on a tear. Internet stocks on the Nasdaq composite index were soaring to new record highs and even the more traditional Dow Jones Industrial Average was trading at record levels.

Adding further fuel to the wide disparity of asset prices, the U.S. dollar index was in its own bull market in 2000, trading at its highest prices in 14 years. The U.S. economy was doing well in the late 1990s and after Asia's problems erupted, the U.S. dollar looked even better by comparison. For U.S. grains, however, the higher U.S. dollar made it more difficult to generate the export business needed to move the domestic grain surplus.

From an investor standpoint, it is difficult to imagine a sharper contrast between the world of depressed ag prices on one hand and soaring stock prices on the other. As they often do, investors drove both trends too far.

Looking back, we now remember the high stock market valuations of 2000 as the dot-com bubble that peaked in March. Many long-forgotten internet companies either went bankrupt or were bought out at much lower valuations than they commanded before 2000.

The U.S. dollar index topped out in early 2002 and traded lower for the next six years after the attack of 9/11 changed the perception of the U.S. economy and the course of U.S. history.

As mentioned above, corn made a 12-year low in 2000 and other crops followed similar paths. 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.

As bearish as the fundamental outlook was for corn and other crops in the year 2000, the downward trend did not continue. For the next 12 years, the once-depressed price of corn outperformed the stock market as the investor pendulum changed its preference.

It is difficult to say what triggers might help turn the cycle this time. It is not likely going to be another 9/11 or ethanol boom, but it will be interesting to watch.

If I could venture a guess, I suspect the next help for higher grain prices could come from an unexpected improvement in world demand. Early GDP estimates are low again for 2020, but even in this slow climate, and in the face of African swine fever, USDA is estimating record high world soybean demand for 2019-20.

Financial assets have their own concerns and one of them has to be the $10 trillion of debt the St. Louis Federal Reserve says is being carried by U.S. corporations (…). Now at 47% of U.S. GDP, problems aren't apparent yet while interest rates are low -- but the potential is there.

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. However, let's not miss the main point of the 1990s experience. It is difficult to see a bullish future at the bottom, but we can certainly sense the signs of being close to long-term lows as we experience them.

Todd Hultman can be reached at

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Todd Hultman