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Corn market stalls out, part II

Agriculture.com Staff 02/08/2007 @ 2:08pm

The corn market has been buffeted by a series of seemingly bearish news items this week. A large 2007 acreage estimate, CRP release talk, and ethanol have all been recent topics. Even with today's (Thursday's) 7 cent rally, corn prices are still down a few cents from last Friday.

The bullish momentum really stalled after the January report. Since then, there's been a lot of estimates out since the report and a lot of gossip, but not much hard news. That will be the case until corn planting begins and the Prospective Plantings report comes out on March 30th.

Plus the CRP situation will be unknown for a longer period of time. Secretary Johanns says he'll look at early release possibilities in early summer. But location, corn price and the current use of the land (hunting, trees, etc.) has a lot to do with a landowner's decision. And will corn really be a viable first crop for any CRP land that is converted back to cropping? Historically, soybeans are the first crop to be planted on CRP ground.

So what about ethanol? Some analysts are reducing ethanol grind in their supply/demand tables. When longer construction times are the reason, that idea seems valid. But others have commented that grind will be less due to reduced profitability.

Ask yourself if you owned a plant that was scheduled to come on line in six months to a year, and you saw reduced profitability, what would you do? Well, there are bills to pay, loans to pay, investors to reward. Just because profits are reduced from the heyday does not mean you will say "let's mothball this plant." You will run the plant, generate cash flow, look at efficiencies, look at new technology, etc. to maximize return on investment.

Most importantly, your plant's risk management team would have been looking at locking in profits months ago. And with more and more plants being built by large corporations (versus the farmer-owned plants which rode the first wave of ethanol growth), risk management is a very familiar topic. These firms also have the capital to engage in a substantial hedging program.

Basic concepts of economics states that as long as the plant can cover variable costs and contribute something (anything) to fixed costs, it will operate. The ethanol industry has not yet tested the rules of Economics 101.

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.

The corn market has been buffeted by a series of seemingly bearish news items this week. A large 2007 acreage estimate, CRP release talk, and ethanol have all been recent topics. Even with today's (Thursday's) 7 cent rally, corn prices are still down a few cents from last Friday.

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