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Don't view outside investment a negative grain market factor, analysts say

Remember a couple of years ago when outside money started pouring into the grain trade, derailing it from its relationship with traditional fundamentals? As economic uncertainty continues, that's starting to happen again.

That's the main message analysts say they took from USDA's monthly crop production and world supply and demand figures, released Tuesday morning. The reports show that while corn yields have suffered from poor harvest weather this fall, that crop will end up the largest it ever has in the U.S. Similarly, the U.S. soybean crop is seen breaking previous production records. (See more from USDA's Crop Production report).

Though there's a lot of uncertainty remaining in what's left of this fall's harvest -- which will likely extend into December in some parts of the country -- analysts see more price stability in grain futures contracts. And, amidst a lot of general economic malaise as the nation starts to take small steps out of recession, that makes futures an attractive buy for outside investors, says eHedger market analyst Gavin Maguire.

eHedger market analyst Gavin Maguire says farmer selling will drop corn prices but lower prices should attract higher demand. Ultimately, there is bullishness for the corn market. (Video by Mike McGinnis).

"There's no doubt that corn [futures] as an investment vehicle has got its own rhythm right now versus a physical commodity that we're still contending with in the field," Maguire says. "There are still concerns with the U.S. Dollar, so commodities have a lot of appeal to them because of recent strength. Investment money will continue to pour in.

"That will swim against the fundamental tide for some time," Maguire adds.

That's not the only dynamic in play here, though. David Hightower of the Hightower Report in Chicago says though outside money will continue to pour into the grains, supply and demand -- which has and will continue to see-saw back and forth between near-shortage and surplus -- won't go away as a market factor. Sprinkle in production costs that are hovering right around the real value of corn (at least according to distant futures prices, Hightower says), and that puts farmers' 2010 planting decisions on the short list of big market factors.

But, Hightower warns: Don't look at outside investment as a negative factor at this point. In a market where the "real value" of the outside contract months is hovering around the breakeven point for corn, an injection of investment money right now might be what the corn trade needs to offer value back to the farmer.

"We're stretching record production, but we're not going to come out with higher ending stocks. If there are notable cutbacks in corn acres and higher corn prices, there are a lot of buyers who are buying multiple years of corn," Hightower says. "When you look at what's happened, these commodities...deserve investment, and if you don't have investment, you won't see supply in the future."

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Remember a couple of years ago when outside money started pouring into the grain trade, derailing it from its relationship with traditional fundamentals? As economic uncertainty continues, that's starting to happen again.

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