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$100 crude, $9 wheat; $6 corn/$15 soybeans?

It has truly been a remarkable year in the commodity markets! Crude
prices have been close to $100/crude recently, wheat rallied to $9.60, and
it makes one wonder just what is up next in the commodity world.

Crude
oil and wheat prices hit levels that were at least three times their early 2002
price levels, and it doesn't seem that far away for gold or silver to
achieve the same type of price appreciation. For corn, though, which
started 2002 at around $2/bushel, prices have so far hit about two times their
2002 price level (stalling at the $4 level with large 2007 acreage), with
three times that level around $6/bushel. Soybeans are in similar territory, with
prices in early 2002 at about $5/bushel and prices currently hovering
around two times that level at $10+. Given what other commodity markets have
accomplished, is it out of the question for corn to hit $6/bushel or
soybeans $15/bushel?

These seem like astounding price levels, levels we at Progressive Ag would
have dared not mention just 12-15 months ago. But one has to be extremely
impressed with the commodity moves that have taken place in the past 15
months.

Last fall, it was only corn that was rallying in a 1970's type
mode, with soybeans still at $6-7, and wheat at $5 levels. These were
very low prices relative to $4 corn futures, and it seemed that corn was
out there on its own in new high price territory. Today, price levels for
the next 3 years out (2008, 2009, and 2010) has harvest price offers
around $6.80-$7.25 wheat, $4.25 corn, and $9.50-$10.25 soybeans. We made
new highs in soybeans (both old and new crop) and crude oil this week,
with Mnpls and KC wheat new crop prices also reaching new highs.

Corn is
within 10c of new crop highs. Never before have we had price offers so
far out into the future at such high levels! But here we are in November,
with lots of time left for an acreage battle, and one has to realize that
there are some historic price moves currently being made in markets,
perhaps even signifying a new paradigm for grain markets.

What could possibly cause corn to run to $6 or soybeans to $15 in the
coming year? Aren't we high enough now? Certainly, no one
anticipated crude oil to run to $100/barrel just a few years ago.
Certainly, no one anticipated the US dollar to plunge to levels today that
we are at (even the Canadian dollar is at a premium to the US dollar).

Could it be that it won't be long before the Mexican peso will be more
valuable than the US dollar? It would be quite the news item if soon
Mexican authorities are debating 'securing their borders' with a fence
such that US workers won't keep illegally immigrating to Mexico! The
plunging US dollar and increasingly expensive crude oil are both
contributing to huge price moves in all commodities, especially grains.

Investment firms are talking about having a commodity investment of at
least 5% in individual investment portfolios - a development mirrored by
the success of index funds trading commodities the past few years.

Huge
money is flowing into the commodity markets, with huge payoffs as
commodities have outperformed the stock market hands down. When you
consider the dollar move lower as well, there hasn't been a better
investment than commodities - especially if you were a foreign investor.

There has been no better US dollar and inflation hedge - both at the same
time.

The possibility of a commodity price bubble developing where commodities
explode to price levels previously unimaginable becomes a real possibility
(in fact, this has already happened to some extent). We are getting
accustomed to big price moves, and with rising commodities it might be
unavoidable that inflation will soon heat up. This looks strikingly
similar to the 1970's commodity price explosion, and US government
officials are even aware of the possibility of this type of move. Once
prices go into uncharted territory (like beans in the teens), moves can be
fast and hard. One only has to look at the crude price behavior, or wheat
price behavior once we unlocked ourselves from previous price ranges.

At this point, one has to try to imagine a scenario where prices do
unimaginable things (pardon the pun). This is no easy chore for
marketers.

Perhaps the best example of this would be the early 1970's,
and it appears to Pro Ag that we are currently in a time period similar to
fall 1973. Prices had already made huge advances, with soybeans shooting
higher in June 1973 and topping out for that period (has wheat done the
same at $9.60???). The next 12 months brought even more volatility to the
marketplace, with wheat/corn rallying 20-50% yet to some unimaginable
numbers (will that be corn/beans in 2008???). The rally was fast and
hard, and no matter where you sold it was a price level one only dreamed
about prior to that year. Farmers started hording grain (not selling),
since owning commodities was the best investment over the previous 2
years. Investors plowed money into commodities, and soon we had pumped up
prices to huge levels.

A wise, famous book once said "There is nothing
new under the sun." Perhaps the next year will be eerily similar to
1974??? At least at this point, it doesn't seem like there are many other
years to compare this rally to. If so, we could have at least 6-12 months
left of grain market rallies to enjoy, which at this point is being led by
soybeans. Farm profitability might be good for 2-5 years after that,
although price levels might not ever exceed the highs seen in the next 12
months.

There is certainly nothing wrong with selling something at $7 wheat, $4.25
corn, or $10+ soybeans. But markets can fluctuate a great deal yet in the
coming year, and price offers could improve significantly. Be prepared
and stay tuned, as new history is still being written, and it is bound to
be a blockbuster best seller!

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 judgment and do not guarantee that 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.

If you have questions about this column, call Progressive Ag at 1-800-450-1404,
or email ray at rlg@progressiveag.com.

It has truly been a remarkable year in the commodity markets! Crude prices have been close to $100/crude recently, wheat rallied to $9.60, and it makes one wonder just what is up next in the commodity world.

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