A rising tide raises all ships?
So far this week, we've seen a sharp correction from the blatantly bullish move since early/mid-January, with some people expecting the weakness to continue. A big South American crop with harvest just getting underway also have led to some pressure on grain markets.
Certainly, the recent rally has been dynamic to say the least, with the rising tide of corn prices reverberating throughout the Ag world this winter. There are cases of rents up 50% or more this winter, with land price sales soaring much more than the 10% increase some reports are saying about 2006. Some sale prices seem up 50% or more this year, with the most upward pressure on rents/values in the corn belt growing area.
It's been an interesting past few months! Grains have rallied sharply during harvest of a pretty good corn and soybean crop.
The USDA Chief Economist has been making alarming statements about the inability of producers to keep up with the rapid ethanol development. USDA's long term 'baseline' projection prepared in Oct-Dec indicates a rapid rise in prices for not just one year, but the next decade. Prices have rallied above key resistance areas in the dead of winter, already indicating intense competition between crops for 2007 acreage.
And it's still only February! Has the recent rally been just a prelude to what's coming this spring and summer? Or will it all be over now that spring is near?
Pro Ag has a hard time believing the bidding for springtime acreage will end now. Instead, typically it heats up as we near actual planting-a scary thought as you consider what markets have already done. If spring and early summer are the exciting marketing time periods, how much more upside potential is there in this market? Already we are at $4.30 corn, $8.40 beans, and $5+ wheat!
It is possible that we are witnessing a historic move in the marketplace, one which may not be repeated for years or even decades. Be careful in this marketplace environment, as price moves could be larger and longer than anyone can imagine at this point. But, we have been well warned by the past 6 months trade, which started with a unprecedented rally during harvest of a pretty good corn/bean crop. This is indeed an exciting time for agriculture!
This week's news will include the USDA Annual Ag Outlook yearly presentations, which will include updates to the USDA 'Baseline' projections which were made last November/December. Recall these showed ethanol production at 1.06 billion bushels larger in 2007/08 than this year's 2.15 billion - in other words, about a 50% increase in capacity in just one year.
This is the unsustainable pace of ethanol development, adding capacity to process 10% more of the corn crop in just one year (from 20 to 30% of our past corn crops). This number will be updated as well as projections for corn acres and all other crops for 07/08 and beyond.
Usually these projections are conservative, so we'd be surprised to see anything close to the 10+ million acres expansion some are projecting. However, to meet all demand sources we might actually need 14 million, leaving the market to allocate the shortage somehow. Perhaps that is what is getting the market goosed higher in overnight trade?