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The bear starts to roar again

Agriculture.com Staff 02/05/2009 @ 9:06am

As we slide into spring, the bear market is starting to re-emerge as prices seem to be sliding lower again.

Gravity seems to have more to say about the market than actual events, with the charts pointing down and most markets slipping lower as another month slips by. While most of the producers await a recovery to sell grain, it seems like that is exactly when the market will not recover.

Lately it seems we try to talk about Argentina (rain or no rain), slow world economies and the resulting slowing of demand, the dollar strength, and various other logical, fundamental sources and of course it always sounds nice if we say the right words.

But really, it seems like the cycle of markets continues to repeat itself over and over again. Understanding the market and the dynamics of it - how it changes human behavior to balance supply and demand under almost any circumstance - is perhaps more important than the events, issues, and fundamental reasons why markets do what they do.

First, some fundamental issue develops which throws supply/demand off kilter. The past few years, the rally of energy to much higher values was the first sign of an impending change in the world commodity values. Corn became more valuable for fuel than for food because energy rose so quickly! Soon, we were chewing through more and more corn for fuel. Then people became concerned about supplies of grain, and buyers/importers started to build up inventories because "we may not be able to buy it at any price". The frenzy rose, and finally we had markets rising to levels where virtually no buyer could afford it anymore.

Producers frothed at the mouth to produce more, with lots of money involved in the production of almost any commodity. The high prices cured high prices (given enough time), as producers had a few production seasons to make decisions on how much to produce. Users found it uneconomical to use corn at over $6, but that didn't stop the market from running to $8! From $8, it seems a long ways down to where we are now at $4 futures, but it sure didn't take long.

The question today is, how excited are producers to produce $4 corn? Perhaps the idea that $4 corn is OK (as long as it returns to $6) is exactly the reason why corn needs to go lower now (not higher) to help us forget we are producing $4 on up corn (to $6 or $8), and instead are really producing $3 corn (on the way to $2?). So perhaps prices will retreat back to $3 by planting - right back to the old lows - to help convince producers that it really is $3 corn or lower they are producing this year.

And just when $3 corn is considered the right price, the chartists will point to $2 corn as the 'chart objective', with some fancy historical reason why prices should drop to $2 corn, $6 soybeans, and $3 wheat. But these prognosticators will miss the fact that $2 corn, $6 soybeans, and $3 wheat cannot pay the bills anymore. Costs are much higher (even without land), and at these price levels production will drop (after a planting season or two) and once again it will be the old panic of "we may not be able to buy it at any price". Perhaps the panic won't be as dramatic as spring 2008, but the same type of panic may occur.

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