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$2 corn?

Agriculture.com Staff 02/06/2009 @ 2:33pm

In recent weeks, pessimism has hung over the grain markets like a wet rag. A number of prominent analysts are suggesting that, before long, there will be a "2" in front of corn futures. We acknowledge that economic woes appear to be getting worse and that exports to date are slower than anticipated, but we are struggling to imagine that corn is about ready to drop to $2.00 and stay there.

Yes, over time, corn can move down to $2.00, but for now, with the input structure priced at record high levels, a price plunge is unlikely. There is always an outside chance that all heck breaks loose when prices of all commodities collapsed, as happened in early December. However, after sliding in December, when there was little friendly news, prices bounced back over $1.00 almost immediately.

Carryout near 1.8 billion bushels, from a historical perspective, is more than an adequate figure that will limit rally potential. Yet, on a long term scale, usage has continued to creep higher. The USDA has made significant cutbacks this year of over 600 million in both exports and feed usage from a year ago and a drop of 400 million in ethanol usage from projections just six months ago. If not for these reductions, it would be difficult to argue for prices to do anything but go higher. The drop in demand is keeping rally potential in check.

Providing underlying support for prices is the cost structure to produce corn. This figure was near $2.25 just a few years ago. Now that the cost of production will likely vary from $3.50 to $4.50 per bushel, farmers will not be jumping through hoops to aggressively plant or add extra fertilizer. The banking community will be tight with fund availability, which will also limit spending big dollars to produce big bushels.

Here is the bottom line: While it is easy to predict extremes, producing corn in the red for the year ahead does not provide much incentive or logic for farmers to aggressively plant and fertilize corn. If there is a positive change in projected demand in the months ahead or less than ideal weather, prices could rally back over $5.00.

Lastly, the ethanol industry is struggling. However, our bias is that most new plants built within the last five years are near state-of-the-art and are not likely to sit idle for long. New investors, government mandates and debt restructuring will provide for continued ethanol production. There is a high likelihood that energy prices may recover within the next year.

If you have questions or comments, contact Top Farmer, 1-800-TOP-FARM ext. 129, ask for Bryan Doherty.

In recent weeks, pessimism has hung over the grain markets like a wet rag. A number of prominent analysts are suggesting that, before long, there will be a "2" in front of corn futures. We acknowledge that economic woes appear to be getting worse and that exports to date are slower than anticipated, but we are struggling to imagine that corn is about ready to drop to $2.00 and stay there.

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