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Ebb and flow of markets

Agriculture.com Staff 02/04/2010 @ 1:15pm

Markets do indeed ebb and flow, and prior to the break in January Pro Ag had indeed warned a few times of some impending problems in the grain markets, mainly generated by outside interests who didn't seem to be supporting stronger grain markets after late December. We cautioned about the good profit margins offered by the marketplace, and many producers heeded these warnings and placed some nice hedges into the market at handsome profit levels.

But surprise, surprise, it wasn't the outside markets that generated the weakness in grain markets in January. Instead, grain markets dropped in January right after a key fundamental report on grains Jan. 12. The increased supplies of grain that were 'found' in that report (although not overly large) were primarily responsible for finally pushing grains into a downtrend. And downtrend we did with a vengeance, with over 10% price declines in virtually all grains in the past 3-4 weeks. This week, the market is finding some strength, and has rallied lightly until today, when sharp losses once again dominated the marketplace.

So here we are, setting our February insurance price elections in a declining marketplace. This is not the type of bidding for acres that we were looking for when the marketplace was all aglow just a few weeks ago. It's amazing how much the face of the market changes from bull to bear in a short time, with little fanfare in between or even debate among the players about the price direction. As a friend of mine once said, "Basically, the market is fickle!".

It's hard to argue with his statement today. The ending stocks projections didn't change much from December to January in corn or soybeans, but prices are a good 10% smaller than they were a month ago, when virtually the same ending stocks projections were out by USDA.

Fickle, pickle! Unless you take advantage of these wild price swings on little change in actual underlying fundamentals, there is no gain from these price swings.

For those who have been heavy sellers of grains at $4-$4.50 corn futures and $10-$10.80 soybean futures, we'll have an opportune time to take advantage of the fickle market by buying back grains sold at perhaps as little as $3.20 March corn futures, and also 8.50-9 soybean futures or lower?

Somewhere there is a line in the sand where grains should no longer be sold, and one potential place for that line is when growers are no longer making any profit margin in the marketplace. We had a 10% or better profit margin in January, but that is largely lost now so maybe we have already crossed that line (or are close to crossing it). We are now closer to break even or even showing small losses on production costs now for 2010 crops.

Maybe another line needs to be drawn in the sand whereby growers start buying back grains already sold at a 10% or larger profit margin. Does that come when balance sheets are bleeding red??? At what level, a 10% loss level, 15%, 20%??? Corn futures prices might drop down to the $3.20 March futures levels quickly now that we've broken the $3.60 support area. Is $3.20 a large enough loss area where we begin to buy back sold grain? Is this where buyers of grain (ethanol, livestock feeders) start to buy in needed supplies of grain??? For sellers with good sales on the books, this represents a 20% profit margin now on 2010 grains sold (the 10% original hedged margin PLUS another 10% profit from markets pushing 10% into the red).

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