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Grains rally despite corn/bean improvement

Agriculture.com Staff 08/23/2007 @ 6:35am

NOTE - Ray Grabanski is writing this week's column from Western Europe, where he is traveling this week to discover in more detail the wheat and feed grain situation in Western Europe.

Grains rallied this week despite an improvement in crop yield potential of both corn (almost 2 bu/acre - a big hike) and soybeans (0.1 bu/acre improvement). Rain continues to fall in the central Corn Belt, now to the point where some areas have received enough precip to restore the entire soil profile, and even caused some flash flooding in some previously critically dry areas (southern MN and into IA). Now, only about 25% of the Corn Belt remains under drought stress, with almost all of it in the southeast Corn Belt (southern ILL/IND/OH and into KY/TN). Even these areas have received scattered showers - remnants of the continuous rain that seems to fall in areas centered in IA.

So while corn/soybean conditions (and yield potential) are improving, grains are still rallying on the CBOT and world markets. Why?

While agriculture looks for all reasons for price movements in supply/demand relationships and weather related developments, the rest of the world has its attention on the potential economic crises developing in the United States with our mortgage markets. In response to the US subprime credit crises (as exemplified by the Countrywide Mortgage situation), the US Federal Reserve has responded swiftly with cuts in key interest rates (an aggressive 0.5% cut) and pumping billions of dollars each day into the currency markets (basically printing more money). This expansionary monetary policy is the focus of all European economic analysts, and covers the newspapers world wide (but especially in Europe).

While so far this has stemmed a panic among world stock traders (and propped back up the US stock market), the US FED policy to battle a recession (or depression) is very inflationary. So far it's working, as US stock owners see stable prices, but it could very well be that in 2-3 years they will notice that their stable stocks will buy 25-50% less than they do today (the insidious impact of inflation). They are essentially 'fooled' into hanging onto stocks which are declining in real value terribly!

The world markets quickly responded to the 'monetization' FED policy by further cutting the US dollar value, which in theory should cause commodity markets (especially those the US exports) to continue to rise sharply in price. Funds plowed even more money into commodities as an 'inflation hedge', with grains still being the primary beneficiary of funds money games. Essentially, commodities and real estate are the best inflation hedges, and funds are making big bets on continued US inflation. This becomes a safer bet as the Fed pumps more money into the US economy.

So this week, at a critical stage in US soybean development and at the tail end of US corn moisture needs, the crop is actually improving at the same time that prices are rallying. This is certainly not a typical reaction of US grain markets, but one that we are getting used to since funds began plowing money into US commodities.

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