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Bull markets

It has been a huge run up in grain prices in the last week (+45c corn, +27c soybeans, +40-
60c wheat), as euphoria builds in the corn market about the possibility of
ethanol development causing a grain shortage in the coming year or two.

Usually, that means we're due for a correction for the bull market to continue.
The 2006 crop fundamentals don't support prices where they currently are, but
futures right now are trading the 2007 crop fundamentals, not 2006 (about 9
months early!). With further ethanol development already in the
building/planning stages, we need a lot more corn acreage next year to prevent a
zero carryout from occurring.

The uncertainty about how farmers will react with
planted acreage next year is causing an explosion in grain prices right now that
current 2006/2007 fundamentals cannot support. But this is a futures market,
and we are already addressing that future problem. With the Chief Economist of
USDA talking about "corn going to new highs," and the new ethanol demand being
"similar to the new Russian grain demand in the 1970's" we are adding new fuel
to the fire. These words are being repeated by financial advisors, brokers, and
analysts nationwide (and they sound shockingly bullish from them, yet alone the
top dog at USDA!). Stock market traders are talking about buying corn futures,
John Deere stock, ADM stock, and just about any agricultural stock on the
planet. Clearly, new highs in corn and a 70c rally during harvest of the second
largest US crop yield in history is making a statement all of its own. One only
needs to look at the recent history of crude oil futures trading to see what can
happen when everyone in the financial community gets bullish a certain market.

If all this optimism becomes reality, we may be just beginning our market rally
as seasonally grains usually struggle at this time of the year (especially with
above-average corn and soybean crop yields). Even soybeans, with record stocks
of both world and US ending stocks are rallying at harvest. This is a market
where we need to open a whole new level of respect for what futures markets can
do. Previous price ranges could become obsolete, as well as any previous
understanding of how much markets can move (both up and down). The potential
for outstanding profits and huge financial rewards to farmers is there, and we
need to make sure we are in position to benefit from it.

Although the bullishness is extreme right now, one also needs to recognize that
current prices offered for 2007 wheat and corn are highly profitable. To not
make any sales while good profits are available is risk in itself that the
euphoria could be unfounded. Risk management is extremely important in such a
market situation. We need to make some sales at these profitable levels, but to
make sure that the newly developed bull market brings us financial gain, not
trouble. The odds are greater than ever before of a once-in-a-farming lifetime
price (and asset value gain) in agriculture, and we want to make sure we get our
share of that gain. One needs to carefully outline how much you can risk on
both the upside potential and the downside risk. A certain amount of that
financial risk might be more appropriately left to the speculative element.
Farmers are also speculators, but their bets are heavily placed in both assets
values and yearly grain crop values. One needs to carefully consider both
elements of his portfolio and how much one wants to risk in each.

Pro Ag has looked thus far at the risk of 1970's like explosion in prices (with
much improved odds today) as one more likely to benefit asset values, and
participate in that type of market that way. We've looked at 2007 and 2008
market values as profitable, and hedged in some of those profits.

But with the
explosion in prices last week, we want all producers to be fully aware of the
price potential the recent rally implies. Make sure you didn't oversell for
2007 or 2008 crops. We suggest you have no more than 50% of 2007/2008 sales on
the books, and make sure they are in manageable positions for cash flow
management (not all in futures hedge accounts). Options may seem high priced,
but with that type of rally potential they may be a bargain in the end (both
puts and calls) rather than opening up more financial risk with margin call
exposure - both upside and downside price exposure. We suggest all producers
carefully consider all these things immediately and make sure you understand
your market positions and their implications to your farm. At this point, it
appears that any hedges in these crops could mean significant margin calls in
the future. If this isn't acceptable, rolling to HTA's, buying puts, or simply
covering some positions on a correction may be in order.

But make no mistake, the market has made an interesting statement the past
month, rallying corn and soybeans into harvest of what is currently the second
largest yielding crop in US history. The bulls seem incited by the Australian
drought, along with some testimony from the chief USDA economist Sept. 6
indicating corn should test new highs in the coming few years.

We find it
noteworthy that this rally began Sept. 15, just days after a bearish USDA
production report. The same USDA put out a rather friendly Oct report for corn,
cutting yields a small 1 bu, but more importantly, dropping planted/harvested
corn acres almost 1 million to cause large reductions in 2006 carryout. While
most corn acreage cuts ended up in soybean production, 300,000 acres disappeared
from ILL - very unusual! So in spite of the second largest yield in history, we
have an ending stocks cut in half from last year's comfortable 2 billion bu.

Pandora's box seems opened, with a tidal wave of fund buying pushing through the
corn market now (at harvest) rather than later. Biofuels is not only the talk
in commodity funds, but also to stock market pundits who also are singing the
praises of the "corn investment." Unless crude oil drops below $50, we may hear
this for awhile.

This is all fantastic news for farmers, who should be beneficiaries of the 60c
corn and $1.50 wheat price rise the past month caused by funds, who yesterday
seemed to turn their attention to soybeans as well. What a great benefit as
growers harvest a nearly 11 billion bu corn crop and 3+ billion soybean crop!
Fundamentally, we cannot support these price gains based on current projections. But, it's the high crude oil/huge profitability of ethanol/biodiesel that's
propelling this drive higher, not current grain fundamentals.

For those who
want to read Keith Collins Sept. 6 statement about that potential (or Oct 12
speech to the biofuels conference), it's posted on his website
http://www.usda.gov/oce/index.htm. When Keith Collins talks, the US public
usually listens.

It has been a huge run up in grain prices in the last week (+45c corn, +27c soybeans, +40- 60c wheat), as euphoria builds in the corn market about the possibility of ethanol development causing a grain shortage in the coming year or two.

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