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Al Kluis: 3 possible price scenarios

Al Kluis 11/09/2010 @ 11:00pm

This question was asked by a farmer at a grower meeting in Quincy, Illinois: Can the grain markets keep moving higher right into harvest, when the rest of the U.S. economy is moving lower?

Here was my short answer: The U.S. grain markets respond more to international grain fundamentals than ever before. And as long as China keeps buying, odds are good grain prices will stay strong.

I explained that the rally right into harvest was unusual and that this had been an unusual year in the grain markets. The January high was followed by a late-June low and now a rally was right into the middle of the corn and soybean harvest.

For me, this is the third time in 36 years I am delivering on some corn and soybean hedges that are below the market. I had a really good crop this year and got about 50% of my 2010 crop sold ahead.

Forward-pricing works about 90% of the time. But this was one of the years where waiting until harvest to get hedges on was the right move. That does not mean I will change my plans for next year. I have locked in good profits on the first 50% of my 2010 crop. And now I will focus on locking in better profits on the last 50% of my 2010 crop.

So how do you position your farm in these uncertain times?

Here are three possible price scenarios going forward. And on the next page, you’ll find strategies on how to position yourself to maximize your gains no matter which scenario unfolds.

Bear: In the bearish grain and commodity market scenario, grain and equity prices put in a major high in the fourth quarter of 2010. And as the global recession gets worse, demand slows and 2010 prices and profits drop lower. This is not likely, but it’s not impossible.

The current global economic risk is one of the reasons we are 50% sold on the 2010 crops and will get more sold by early 2011.

Bull: In the bullish grain and commodity market scenario, gold and crude oil lead all commodities higher. The U.S. and global economies would start to inflate and investors would buy commodity and commodity-related exchange traded funds (ETFs), taking all commodity prices sharply higher. This scenario is not likely, as the most recent economic data still show a greater chance of a slow economic recovery in most of the Western economies.

Both: The short-term bearish grain market scenario unfolds with prices dropping back into February-March of 2011. The bulls then take over as the 2011 acreage battle and weather scares rally prices higher into April-August of 2011.

But before I can make marketing strategy recommendations for any operation, I need to ask 4 key questions.

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