Grains lower, but for how long?
Grain prices have drifted lower the past few weeks, led by last week's first lower weekly close in corn/beans since the rally began last September. The question on everyone's mind is "How far can we go down?"
One really needs to appreciate the market potential now after last fall's rally. Given the scope and size of that rally right during harvest of a pretty good US crop, it opens up the potential for fairly large, volatile price movements over the coming year. Pro Ag wouldn't be surprised to see a sharp price break in the next few months, with possibilities as much as a 50c drop from corn highs and 75c in beans. Already, wheat futures have dropped 80c from their March CBOT highs! Is it a stretch to expect corn/beans to experience something similar?
While it's been psychologically challenging to figure out what the market intends to do, usually that is just what markets try to do-confuse and intimidate. So far, it's clear that while the upside run was huge due to fund inspired buying, the correction lower could also be substantial.
There are four reasons for a break now. First, expanded acres in the southern hemisphere due to higher prices at planting. Could that explain why prices rallied during the US harvest, to attract acres in the southern hemisphere? Second, funds' profit taking prior to the end of the year. Since most funds are big-time longs in grains, perhaps they want to pare their positions and take some profits?
Third, a price break is possible on ideas that the big price improvement has already attracted from 8-10 million more corn acres in the US. Is that enough for the 2007 crop year? Fourth, excellent early season growing weather in South America (SAM).
While a correction has been well anticipated, some are indicating this might be a market top (more declaring this potential in wheat than in corn/beans). Wheat prices especially have been in a nice downtrend since mid-October, with prices drifting lower in a rather well established channel. This is not altogether unlikely in corn/beans either for the next few months.
However, the market might have some difficulty maintaining that price drop, as the US gets closer to spring planting. While the US is likely to shift a significant amount of acres to corn next year that could create a problem with some other crops supply/demand balances. Certainly both wheat and feedgrains already have tight ending stocks (both world and US), so there isn't much room for acreage losses in these two crops. It's likely most other crop acres will be down to accommodate that large a corn acreage increase, so it could create some interesting marketing scenarios in the near term. For now, though, corn seems king as far as profitability analysis between crops, and there is little question that growers are gearing up to plant more corn.
But how much more? Analysts currently indicate we need from 6-10 million more acres of corn to meet current demand, with Progressive Ag more on the high side of this range. Have we attracted enough acres? This week some private analysts will take a stab at that projection, but it might be a case where grain markets are like a pinball machine for the next few years, with different grains 'lighting up' and ringing the bell for good prices at different times.