Bull market phase 3?
Grains are giving everyone quite a ride the past 13 months. The ride started with an initial rally from corn given what looked like an impossible task last fall to increase acreage and cut the rapidly expanding ethanol industry down to an appropriate size.
We first began to realize the impending 'corn problem' last fall, when we started looking at the speed of corn ethanol plant development and profitability of these plants. Their competitiveness in being able to purchase corn scared a lot of people into believing ethanol plants would keep being built regardless of how high corn prices would get. Relationships between ethanol and gasoline prices based on energy value were assumed, and given this value things couldn't change.
But change they did. In April 2007, corn lost its leadership role in the grain bull market to wheat, with a huge wheat freeze in US winter wheat country causing some huge losses. Other countries around the world also felt the sting of smaller than expected wheat crops including the EC-27, Australia, and others.
Combined with the willingness of growers to abandon wheat for corn acres (both freeze-damaged and spring wheat acres) and we really sacrificed wheat/soybean acres for the needed corn acres. We got 14-15 million more acres of corn (much more than expected), so once those acres were known this spring corn lost its leadership role in the grain markets. This completed "Phase 1" of our grain rally, which was led by corn.
Enter "Phase 2", the wheat rally, beginning around April 2007, where wheat prices exploded far above anyone's projections this year, with funds unloading long positions of corn and plowing that money back into the wheat market. They owned well over 1 billion bushels of wheat through most of the summer rally, with some huge profits banked in the wheat market by speculators by now.
During "Phase 2", other food crops such as soybeans, bean oil, and minor food crops also rallied nicely due to the substitution factor for foods. The ability to switch easily production capacity from producing specialty crops to wheat/soybeans also influenced minor oilseed prices. Meanwhile, higher soybean prices threatened to 'steal' acres from the minor crops if profitability didn't rise.
Wheat prices actually almost went equal to soybean prices during this phase, as the acute problems in wheat worldwide were not being repeated in the corn or soybean markets - mainly due to decent US 2007 corn/bean crops. We will get a better idea of just how good these crops were Friday, in the USDA October report, and that is likely to give the market a fair amount of direction in the coming weeks/months.
It appears, though, that the corn 'problem' has almost had 2 check marks now made against it indicating the problem might be solved for awhile (even into 2008). The first, was the huge corn acreage planted, with nearly 93 million acres in 2007. It was almost unimaginable that farmers would respond that much to the incentive to plant corn. Even after the intended acres were announced, many argued that we couldn't get that many acres planted in such a short period of time.