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Are soybeans the new sheriff in town?

Soybeans have taken over the leadership of the grain market the past
week, rallying to new highs while corn languishes at old price levels near
$4.00. Not only did the March soybean futures run to new highs, but also the
Nov. 07 and Nov.08 contracts, meaning this may not be just a short-term
supply shortage in soybeans this year.

In fact, soybean supplies have never been larger than the current 575 mb
projected carryout in the US. But futures markets look to the future, and
it doesn't take a rocket scientist to figure out what will happen to US
soybean carryout if we switch 10 million acres of soybeans to corn in
2007, and then add to that total for the 2008 crop year. Eventually, it
doesn't take long to project a shortage of soybeans - even though we
currently have record carryout.

This is perhaps the best thing grain farmers could have hoped for, with an
unusually large new demand for US grains coming on-line, a demand we can
see (ethanol plants being built) and even plan ahead for (it takes 12-24
months from inception to completion of a plant). While at times it
appears too good to be true to see such a large change in market
perception from last year at this time, it also doesn't seem like the
market will find an easy/quick solution to the current situation.

Until we find a way to meet the new demand for fuel as well as the
existing demand for food/feed, the market is left to deal with this
situation on its own. Markets will work, as they almost always do in the
end, but the means to the end is what is holding everyone glued to their
crystal balls. Everyone wants a clue to the eventual solution and the
steps the market must take to solve it.

Often times the market deals with things in a way that is totally
unexpected, so it may be somewhat an exercise in futility to make
projections at this point. But there are a number of factors and
possibilities that could help solve the acreage problem that is currently
plaguing the marketplace.

1. Crude oil prices could crash below $30, in effect ending the ethanol
gold rush that investors are currently pursuing. This would make ethanol
plants unprofitable, and thus end the current seemingly impossible
situation to feed all the additional ethanol plant construction. Yet,
recently crude prices have risen nearly $10 from $50 back to $60- not the
solution we've been looking for.

2. Ethanol subsidies could end, with the public making a decision without
additional market pressures to subside their support for alternative
fuels. But wouldn't this also send the wrong signal to those investors
who have pursued our nation's stated goal of energy independence- just
when they seem to be making some successful progress?

3. Livestock feeders could cut corn feed use significantly by cutting
livestock numbers, with the current prices eventually doing its job. But
so far, there hasn't been much sign of this from the market. Does it just
need more time to finally work its magic?

4. Importers could stop purchasing US corn as they see how high prices
have gotten and make other adjustments. Yet, so far there is little sign
of a slowing of corn exports (in fact, exports are well ahead of the
projected pace and need to slow soon, or they will end up higher than
currently projected).

5. US farmers could shift 10-12 million acres of soybeans to corn,
effectively meeting most of the anticipated demand given a normal crop.

An above normal crop might even give us a little cushion for next year in
corn, while still leaving a little carryout of soybeans (albeit much
smaller than the current large projection). However, this cannot continue
in 2008 as eventually something runs into negative carryout levels.

While most of the above solutions can bring a quick end to the current
corn shortage, we doubt that any will be long-term solutions to the new 'food into fuel' paradigm presented in the marketplace. As it currently
stands, the market seems to think the last listed solution is perhaps
occurring, leaving corn markets flat after the Pro Farmer acreage
projection, but goosing the soybean market. While these acreage shifts
seem a little high for now, one thing this does bring to light is the
dominoes-type game the markets may be left to deal with due to limited
acreage. If we get the corn acres (from other crops), it just leaves the
other crops in need of higher prices to limit demand for it later.
Soybeans for now are taking that role, leading the market higher this past
week or two.

Where does it all end? You can't just keep robbing Peter to pay Paul, as
eventually Peter will also run out of cash (or in this case, excess
acreage). Even with record large soybean carryout, there is an eventual
end to robbing soybean acreage to feed corn demand. It's just a short-term
fix to a long-term solution. As is usual when problems present
themselves, the long-term solutions solve the problems, not short-term band-aids. Barring any major surprise as presented above (and any
combination of these things can lesson the market pressures), it may just
take higher prices all around to permanently solve the acreage shortage
and surplus demand for grains. Higher prices for an extended period of
time might be the long term solution to the problem of demand outstripping
supplies. Extended periods of high prices will both goose the acreage of
crops, put new money to work developing new production technology, and
also limit demand for those crops with tight supplies. We've got a start
to making this solution with $4 corn and $8 beans, but is it enough?

At
this point, it appears we'll need more than just a short-term solution to
solve this long-term problem.

Soybeans have taken over the leadership of the grain market the past week, rallying to new highs while corn languishes at old price levels near $4.00. Not only did the March soybean futures run to new highs, but also the Nov. 07 and Nov.08 contracts, meaning this may not be just a short-term supply shortage in soybeans this year.

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