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Bull markets

Agriculture.com Staff 10/18/2006 @ 10:50am

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.

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