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Looking for signs

Agriculture.com Staff 10/17/2008 @ 8:00am

For many of the marketing meetings I have been a part of in the past year, I have focused on the effect of bio fuels and the currency exchange rates in the landmark rally in grain prices.

My theory has been that the unprecedented demand for grain as an energy source and the export demand caused by the weakening dollar would put a floor under grain prices, preventing them from returning to the low prices of the 1990's. I showed that even if some of the planned ethanol plants did not materialize or currently operating plants closed, the market for grain as fuel was big enough to keep prices above their previous low levels.

I explained that foreign demand would only drop if the US dollar index returned to its previous high level after dropping from 120 to near 70 since 2002. It will be interesting to see if my theories prove correct. The dollar has rebounded as the world financial crisis developed. However, this rally takes the value of the greenback only back to the low 80's, or roughly 20% of what it lost over that time period. It is nowhere near what would be considered average compared to other currencies.

There are rumors of ethanol plants shutting down or going broke. At this time, I only know that I hear and read in the media. I still believe that this market is so big that some of the plants can go off line or never be built and the rest will be major support for grain prices.

We also need to be watching the exchange rates of countries that compete in world markets. The currencies of Brazil and Canada have recently been devalued more than the U.S. dollar has gone up. For Brazil, especially, that means that inputs for the crop that is about to be planted will be very expensive. Any hope of increasing acreage is probably gone. For the first time today, I heard on the radio concern that the Southern Hemisphere crop may not be as large as the trade hoped.

It is too early for these big picture items to immediately cause grain prices to rise. However, it is also the time of year when we normally expect prices to find a harvest low. In addition, the cash soybean basis compared to March futures here in eastern Nebraska has increased 35 cents since September 29. In normal years that is a sign that prices are improving. That has obviously not been the case in the past two weeks. Nonetheless, it is encouraging to see the stock market rally strongly in the last hour of trading as it did yesterday. I hope it means the psychology of the markets is stabilizing. At least it proves that prices can move in both directions!

For many of the marketing meetings I have been a part of in the past year, I have focused on the effect of bio fuels and the currency exchange rates in the landmark rally in grain prices.

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