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Al Kluis: 5 factors that created the grain market rally

Al Kluis 04/04/2011 @ 11:00pm

2011 Corn: July - December Spread

Did you forecast grain prices to go this high last year? What caused it?” These were the first two questions from a farmer at a seminar in Colorado this winter.

The first question was easy to answer: No, I did not forecast corn to rally above $7 or soybean futures above $14 last year. But I did expect $6+ corn and $13 soybeans after looking at the January 12, 2011, USDA reports.

The answer to the second question is a longer answer. There are five main factors that caused the grain market rally into the spring of 2011.

1. Record demand from China for more grain. The economy in China continues to grow, creating more jobs as its economy expands rapidly. China is creating a lot of jobs, and wages are increasing. This is increasing its demand for meat, especially pork and chicken. China is importing a record amount of soybeans and has become a net importer of corn.

2. The smaller harvest in Russia and the Ukraine in 2010 due to the worst drought on record. Those two nations have become major export competitors in the wheat, barley, and sunflower markets in the last five years. The 2010 drought resulted in an export embargo. Many nations that usually bought wheat from Russia and the Ukraine changed the purchases to the U.S., and wheat prices led the corn and soybean markets higher.

3. The smaller harvest in the U.S. In August 2010, the USDA and most private analysts were projecting a national yield of 162 bushels per acre for corn and a total corn crop of over 13 billion bushels. Due to extreme heat, the final national average yield dropped back to 152.8 bushels per acre, with a total corn crop of just 12.447 billion bushels. This dropped projected ending stocks from over 1.2 billion bushels to just 675 million bushels, or an 18-day supply.

4. Crop production problems in Argentina. The world needs a large crop out of South America in 2011. However, Argentina was hit with hot, dry conditions through the spring and into the early summer. The result is a drop of about 6 million metric tons of soybeans, or a 200-million-bushel drop in production in 2011 compared to 2010. The total corn crop in South America also looks to be 200 million bushels less than last year. This keeps global buyers coming back to the U.S.

5. Crude oil going to over $100 per barrel. This is keeping ethanol profitable and leading the USDA to project an additional 50 million bushels of corn being crushed to ethanol. Ethanol processors keep grinding more corn. And with high sugar prices, corn sweetener production has also increased. U.S. and global corn and soybean demand continues to grow.

A third question

A third question was asked at that recent Colorado seminar: “What will signal the top in the grain markets?”

I don't have one surefire sell signal, but I will watch these five primary indicators that will signal a possible peak.

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