The Big Move (Part 3): The 2011 Corn Bubble Will Burst

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 |  Includes: AGA, CORN
by: Justin M. Hall

<<Click here for Part 2<<

Over the past six days, I have tried to present the case for why I believe corn prices are headed lower.

On September 1, 2011, I explained that corn prices will likely correct in the near future. While prices are high, South American farmers – namely those in Argentina and Brazil - are planting corn like crazy. I contend that South American corn will help offset potential supply constraints should such constraints actually materialize.

In a September 5, 2011article, I provided my readers with a game plan for playing the falling price of corn. Corn demand should come down some next year (2012) as subsidies and tariffs on foreign ethanol expire at year-end (2011). The spike in farmland prices coupled with a significant increase in farm income suggests that a corn bubble has formed.

Long and Short ETF Plays

To play the falling price of corn, I have recommended that investors take positions in one or both of the ETFs below.

#1 Teucrium Corn (NYSEARCA:CORN): I recommend playing either in-the-money or near-the-money CORN puts with a preferred expiration of February 2012.

#2 Powershares Agriculture Double Short (NYSEARCA:AGA): I recommend buying shares of AGA at / near $15. Plan to exit in six or fewer months at $30 with a double, 100% gain.

Reference the weekly charts below.

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In this article, we’re going to take a look at the charts as well as historical data on corn futures. I will try to keep it simple. So, hang with me.

Charts

In the last 41 years, I have identified five significant price spikes in corn futures – 1974, 1980, 1996, 2008, and 2011. The significance of the 1980 spike is debatable. However, a double top was formed in 1980. I believe the double top could prove to be relevant later on. For this reason, I felt it was important to include the 1980 spike in my analysis.

Reference the two monthly charts below.


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Data

On average, corn prices advance 127.2% in a period of 13.4 months during a significant spike (or bubble). In the 2011 corn spike, prices increased approximately 127% (from low to high) within a period of 12 months, which is right in-line with the averages.

On average, corn prices tend to fall -46.75% from the peak and within a period of 7.5 months.

Review tables below.

Conclusion

While I could always be wrong, I believe corn prices likely peaked at/near $7.99 per bushel this summer (2011).

Applying the averages in the table above, the price of corn could fall somewhere between $3.75 and $4 per bushel by January or February 2012. If so, CORN puts and AGA shares could provide investors with respectable gains.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CORN over the next 72 hours.