The corn market is a great illustration of this key maxim. For raw materials, high prices eventually lead to low prices because demand is reduced and supply is increased.
The vicious drought this year basically destroyed huge amounts of the corn crop. Supply has fallen far below previous years. Everybody knows this so this is baked into the current price.
But what will happen to demand?
High prices will choke off demand as users try to shift to alternatives to corn or simply forgo using corn all together. It is always hard to estimate how much demand will be choked off but we definitely know it will be.
The chart above shows the current situation in the CORN ETF.
I think that it shows a market that is in the process of moving from a bull to a bear market. We know that there will be little corn and the price looks like it is already choking off demand.
Technically, it looks like we have the majority of a head and shoulders formation. A break of the lows this week would suggest a move down to about 40 over the coming months.
Even if I am completely wrong about the formation, the fact remains that prices will come down over the coming year and should create the opportunity for profits on the short side!