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$1 rally in corn?

Corn rallied $1 from its lows just over a week ago, with March trading above $4
again today. So much for limited volatility! While sellers were having their
way with the market 2 weeks ago, now buyers might have the upper hand as markets
have rallied significantly. So what changed in the last 2 weeks?

One major factor is the dollar value, which has dropped about 7% in the past 2
weeks. The dollar drop makes all commodities cheaper to importers, and thus
helps to add value to commodity values. The past few months prior to this the
US dollar rallied sharply from about 70 on the index to almost 90. The drop to
80 took very little time, and now the trend for the dollar seems to be down.
That could have huge implications for the trend of grain values going forward in
2009.

The US economy also seems to have stabilized somewhat after weeks of unpleasant
news out of banks, stocks, and traded major companies. There hasn't been any
more rumors of companies failing lately, and even the Detroit carmakers might
find a way to survive the next few months. While layoffs have occurred, the
stability in the stock market above 8500 recently is encouraging, actually
rallying above the previous 7500-8500 range. While the economy is still
precarious, as least now it is stable.

The FED has also indicated a willingness to do whatever it takes to keep
financial market/commodities at decent values - and avoid depreciation of asset
values. This week they dropped the Fed Funds rate to the lowest ever at 0.25%,
with many banks following these numbers down. There is very little return from
keeping money at banks, but people are so worried about the economic outlook
they are willing to accept almost no return rather than risk their money in
stocks, commodities, or other risky assets. While deposits are high, there
still is very little borrowing from banks to the public. Part of the problem
might be that many banks are not following interest rates down, as already
depositors are getting very little return for keeping their money in banks. So
they keep their interest rates at 4-4.5% regardless of what the FED does! This
could make the more recent cuts to near zero percent interest not as effective
as a 0.75% cut normally would. In time we shall see!

Finally, while demand destruction has been the talk of the commodity markets the
past few months, now supply destruction is becoming a vogue concept. After all,
prices declined so quickly that producers are wondering how they are going to
pay for any new production (whether it be grains, oil, energy, or any basic
commodity). South America is unlikely to expand production much now that
planting is over, and so far surveys of North American producers show little
interest in increased production. Could that pull stocks levels back to
uncomfortably tight levels?

Already corn prices have rallied such that the soybean/corn price ratio has
dropped below 2.0 for 2009 crops. That favors corn on the sale side
traditionally, but look where many input suppliers are leaving input costs (like
potash fertilizer). It makes it difficult to produce corn at a loss due to
inflated fertilizer/input costs, so you can't hardly blame the producer for
noticing!

While markets likely topped last year, we still have a lot of trading room for
some huge volatility given the past year's trading ranges. A rally back to
$5.50 corn, $10-$12 soybeans, and $7-8 wheat might now be so far off the mark.
For corn, from the lows just 2 weeks ago, we are already half way there!

The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable. The
opinions and recommendations contained are based on our judgement and do not
guarantee profits will be achieved or that losses will not be incurred.
Recommendations should not be construed as an offer to buy or sell
commodities. There is substantial risk of loss in trading futures and
options on futures.

Ray Grabanski is President of Progressive Ag, a marketing and risk
management firm for farmers located in Fargo, ND. For questions or
comments, or if you are interested in more information about Progressive Ag's
common sense marketing services, call 1-800-450-1404 or email
Kristi@progressiveag.com.

Corn rallied $1 from its lows just over a week ago, with March trading above $4 again today. So much for limited volatility! While sellers were having their way with the market 2 weeks ago, now buyers might have the upper hand as markets have rallied significantly. So what changed in the last 2 weeks?

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