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Corn, where from here?

Agriculture.com Staff 07/28/2008 @ 1:24pm

Since recently peaking, December corn futures made a historic plunge of nearly $2.40 and are currently trading under $6.00. The three major market movers are weather, energy, and speculative interest. All three negatively impacted corn futures the last few weeks. Now the question is whether the high or low is in for the year.

December futures may very well have seen their high for this year, peaking just under $8.00. The rationale that bearish traders will use is simply that a number of variables have aligned in order to push prices to historic levels, and that a repeat is unlikely. Mainly, the market was trending upward due to speculative buying interest on ideas that the world could run severely tight on supply. Demand has been building not only because of increased feed use, but increasing world development of ethanol and other bio-energies. This caught the attention of the investment community, which pushed dollars into the corn market. A historically wet spring, especially in the core producing states, helped accelerate the move upward.

Yet when prices fell, the move down was so rapid, it was a strong indicator that the market was overbought. Where might prices go from here? Our bias is that December futures will bottom near $5.50. Assuming a 50-cent basis, cash prices will be close to or under $5.00. We feel many farmers have already sold enough for 2008 and are unwilling to market more grain at lower levels. We roughly estimate a breakeven at $4.50 cash. Therefore, if farmers are selling corn for $5.00 a bushel or less, the return on investment is about 11% or less. We do not see farmers as aggressive sellers under 10% margin on the remainder of 2007 crop.

Lastly, a pullback is healthy for demand, especially in the long run. If prices had continued higher, one could expect livestock liquidation and ethanol plants to close. Now that prices have set back and it looks likely there will be crop, the market may consolidate but will not likely sell off much further. If weather becomes a factor, especially a supply shock (which could occur if there is an early frost), prices could double. For now though, rallies should be viewed as opportunities for cash sales or PUT purchases. If you want to cover cash sales or feed needs, consider buying CALL options.

If you have questions or comments, contact Bryan Doherty at Top Farmer at 1-800-TOP-FARM ext. 129.

Since recently peaking, December corn futures made a historic plunge of nearly $2.40 and are currently trading under $6.00. The three major market movers are weather, energy, and speculative interest. All three negatively impacted corn futures the last few weeks. Now the question is whether the high or low is in for the year.

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