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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?

USDA also showed in the 'baseline' numbers a corn carryout from 600-800
mb for the next DECADE (and farmer price received averages from $3.30-
$3.75 for the next DECADE), and that was before the shockingly bullish
Jan report, cutting corn carryout another 175 mb this year. So does
that mean we actually have 425 mb carryout projected next year?

USDA
will have an even shorter supply to deal with in this week's update, so
it could be very exciting to the market to see a glimpse of these
numbers. Also interesting will be whether they hike the ethanol use
again in this report, indicating no slow down of new plant
construction. Our Chief Economist Keith Collins also will get another
shot at making predictions, and since September almost everything he
has uttered has been very bullish to grain markets. Will this week be
any different?

As we move toward spring planting, it seems apparent that many expect a
10+ million acre shift to corn in 2007, with most of those acres coming
from soybeans. But very wet soils in the eastern Corn Belt (ILL, IND,
OH, MI) could mean planting delays in these areas, which could push
some intended corn acres back into soybeans. Not much fall work was
completed either in this soggy area, so it may be difficult to get all
the corn acres planted.

Recent wetter weather across the upper Midwest
also could spell some trouble for planting all that corn. If we get
the big acreage shift to corn, it might dampen the outlook for corn.
But, it also could help all other crops price outlooks, as corn takes
more and more land resources away from traditional crops. So, 2007
might very well be the year where the rising tide of corn prices raises
all other crop price 'ships'. This makes for some interesting
projections as we move forward into 2008.

Let's just hope the ethanol
train also continues plowing forward on its tracks; certainly this
train is steaming ahead full speed right now, and it may take some time
to slow it down from this break-neck speed. That couldn't be any
better for grain price outlooks in the future. The only remaining
question is, how long before the production factory gears up for the
new, higher levels of demand which include fuel demand?

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.

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