Corn Again!

The ‘Hillbilly cycle’ was a well documented price cycle between the price of corn and the price of pigs. Hillbillies in the US were characterised as the swing producers of either corn or pigs. Basically, high corn prices this year would lead the Hillbilly to switch from producing pigs to corn. As the supply of corn rose, and the supply of pigs fell, corn prices would fall the following year while the price of pigs would rise. On seeing this price change, the Hillbillies would switch from corn to pigs and hence the cycle would repeat itself.

Silly Hillbillies, you think…surely that would not happen in the modern markets which are forward looking, informationally efficient and dominated by smart people from Goldman Sachs and JPMorgan? Well think again…

Last night’s 7.6% fall in the corn price welcomes home the Hillbilly! Yes, folks, participants in the corn market were apparently surprised that last year’s massive run up in the corn price has actually triggered a large, positive supply response. The USDA reported 5 billion bushels of corn stocks in the US, which was over five times greater than the market had expected. Needless to say, corn prices fell by the most on record to USD 6.45 per bushel. My guess is the price will normalise at something close to USD 4 per bushel, which is consistent with pre-drought prices.

That means the corn market has a long way to fall from here so get short and you can thank the Hillbillies at Goldman Sachs and JPMorgan for the profits…