The four comparable markets, and we’ve shown this before, were the sugar in 1974, silver in 1980, cotton in 1864, and corn in 1864. Those four markets declined in excess of 71% in price. We are looking at what occurred after those lows were in place during those four markets to look at what potentially could be the DNA in our market and how our market could play out.

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You can see that the silver, cotton, and corn all experienced very comparable rallies (the orange lines) from the standpoint of length of time from their lows to what were bear market rally highs. The red points mean a red light. That means they started the next leg down in an overall bear market. The declines which occurred after these target points all resulted in declines to new bear market lows beneath what would be the December 19th low at 32.40 basis the nearest futures.

We are in a bear market. This is a first leg down. These target points are the first bear market rallies after the first leg down, and all of these were followed by legs down in a continued bear market. We’ve never had a bull market on the order of crude oil in any commodity that’s been completed after a single leg to the downside. I cannot emphasize this enough. When you see this kind of velocity of deflation like in the crude oil, you don’t turn around on a dime. We had a seven-year bull market in the crude oil. Here we’ve had a five-month bear market leg down, and we’re not just going to finish the bear market in five months, and then off we go on another bull market that previously was seven years in the making.

It just has never happened historically, so we would have to literally rewrite 220 years of U.S. financial history. The probabilities are just that that’s highly unlikely. We are statisticians and look at history because that represents human nature and human nature in action. Yes, we’re going through some very difficult times financially, but believe me, the United States has been through some very critical things. We’ve been through the Civil War, we’ve been through World War I, we’ve been through the Great Depression, and we’ve been through World War II, so these are huge economic dislocations which have occurred and do occur throughout world history. We’re in the middle of one of those things right now.

All that to say that our markets are not confounding us, and they’re not a mystery as to what’s taking place because we have a great deal of history in what’s taken place. This is one of those things that we’re saying, “This is what’s happened after commodities declined on the order of what we’ve seen.”

When an unofficial Chinese website broke the news on Wednesday, November 16, 2005 that the current outbreak of bird flu is allegedly much worse than admitted, CBOT traders concluded that if a Chinese chicken sneezes, the domestic corn market might catch a cold. March corn fell 3-1/4 cents to close at 206-3/4, and the 3 nearest-month futures contracts (December 2005, March ’06, May ’06) continued hitting life-of-contract lows through week’s end.

A chicken may eat like a bird, but one commodity analyst said he’d heard “talk that the Chinese soybean crush may be down 40%-50% due to reduced feed demand in the poultry sector.”

A U.S. outbreak of the deadly avian influenza A strain (H5N1) could spark a consumer panic. The U.S. leads the world in poultry production ($23 billion a year of chicken, turkey and duck) and exports. Bird flu has killed dozens of people in Asia and prompted the destruction of 150 million birds worldwide. In countries where H5N1 has appeared, chicken consumption plunged and exports practically ground to a halt. Other nations would presumably set up an immediate embargo if the virus were discovered here. The USDA has taken the precautions of banning live birds and eggs from infected countries and requiring quarantine and testing of all imported birds.

For its part, the agency currently sees no more than limited and temporary impact on U.S. corn demand from AI. In the words of the Agriculture Department, “With the highly pathogenic avian influenza (AI), H5N1, being reported in Russia, Turkey, and several European countries, and with its resurgence in China and Southeast Asia, speculation is rife with predictions of slashed global feed demand. It is worth noting that, during the previous outbreak in Asia a year ago, the effects were mostly temporary and, with a few exceptions, poultry production and feed demand bounced back within months. In the case of China, reductions in poultry consumption were offset by increased pork consumption. Although the spread of H5N1 to Europe is alarming, the region has weathered its own bird flu storms before. In 2003, the Netherlands had an outbreak of H7N7, another highly pathogenic AI strain, which led to the culling of over 25 million birds. Within a year, the poultry sector largely recovered and feed demand returned to its previous level. Although the effects of the current AI outbreak could reduce corn demand in the short run, particularly given the increased media attention and consumer reaction, at present the situation is not expected to reduce U.S. exports over the next year.”

Export sales are already well behind last year’s figures. With the corn harvest all but complete, the USDA estimates production again topped 11 billion bushels, making this the second-biggest crop ever, behind only last year’s. The surplus not surprisingly leaves us with a carryover expected to exceed 2.3 billion bushels, amounting to the largest stockpile since the 1980s.

No wonder corn, despite an unusually long bear-market rally basis the cash that persisted from November 4, 2004 to last July 18, ranks as the worst performing commodity on the board since the important low in overall commodity prices 4 years ago.

Corn was even one of the few commodities not boosted last summer by Hurricane Katrina. After the storm, as crude set a record and unleaded gas went ballistic, grain prices initially fell on fears exports wouldn’t make it out of the Port of New Orleans. By the time those concerns abated, a bumper harvest blindsided the market, even while zinc, copper and lumber surged on rebuilding needs, and gold forged to a succession of 18-year highs.

So far, the bear market in corn has been pretty average by historical standards in terms of both extent and duration. Now, given the seasonal tendencies – especially pronounced in the past following bear-market rallies lasting over 6 months – and potential influence of a couple of major cycles, including the 50-year, corn has entered a critical timeframe.
Excessive carrying-charge premiums

Perhaps the single most important aspect of the corn market presently, however, is the staggeringly high carrying-charge premiums that prevail in the distant months relative to the cash market and near-term futures. The July 2006 contract closed 30 cents above the front month of December in the week ended Friday, November 18 – an almost 16% premium. The nearest futures finally pierced their December 2, 2004 bear-market low, a dubious feat long since accomplished by the cash crop.

To us, the situation strikingly resembles the wheat market in July 1999, when we called a monumental low in cash wheat. As then, the prohibitive carrying costs loom over the market, promising surprises and posing a threat to both bulls and bears alike. We believe this interesting pattern in corn lends itself to a potentially lucrative options strategy.

To find out how corn will fare, or to receive our latest insights on more than two dozen other futures markets based on 6000 years of cumulative price data and the powerful analytic tools of W.D. Gann, check out the Complete Forecasting Service.

About the Author:

James Flanagan is the president and founder of Gann Global Financial. In 1978, while majoring in economics at Claremont McKenna College, he acquired his first book written by W.D. Gann, “How to Make Profits Trading in Commodities.” This set in motion his passion to validate the claims of this early pioneer of market psychology and technical analysis. In April 1990, he launched his first newsletter Past Present Futures which has been in continuous publication since that time. James Flanagan oversees all of the research and research development at gannglobal.com.