Extremes

Agriculture.com Staff 03/16/2007 @ 12:12pm

Lately we have fielded a number of questions from producers who have asked what effect a drought market would have on corn prices. Drought, historically, is the greatest hindrance to a crop and could send prices sky-rocketing. Corn prices could double or triple!

With projected carryout near 700 million bushels, there is not a lot of room for this year's crop size to be anything less than average or, for that matter, even slightly above average.

Even with an 8 million acre increase in corn plantings, along with yield of 152 bushels per acre, carryout is likely to decline. An acreage increase in the 10 to 12 million area, along with a yield averaging that of 2004 at 160 bushels, could push corn carryout to a comfortable level. But, what if yield is down to 130 bushels per acre? Theoretically, the supply of corn is depleted!

However, supply will never dwindle to zero. Rationing will occur, and this is the window in which prices could make an extreme move upward. How extreme? It would not be unusual, especially when studying markets from a historical perspective, to see corn prices double from the winter highs. Therefore, new crop corn prices could reach $8 per bushel on a significant fallback in production.

With the onset of massive fund buying (never seen before the last 4 to 5 years in commodity markets), along with more speculative awareness in the U.S. and throughout the world, prices could add on another $2 to $4 per bushel. Bottom line, an extreme move puts corn at 3 times the winter value. When looking back at the volatility of the 1970s, many commodity markets, especially in agriculture, made dramatic leaps. Soybean prices, trading near $3 per bushel, had rallied to $12 (or 4 times their value) prior to the rally.

While we admit this is an extreme, you should have an open mind to the possibility that prices could make dramatic moves. Be sure you understand the implications if you are a feed user and/or if you have insurance that has limited coverage. Lastly, if you forward sold significant amounts of corn, do not get left in the dust, assuming prices cannot make an extreme move. History has proven otherwise.

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

Lately we have fielded a number of questions from producers who have asked what effect a drought market would have on corn prices. Drought, historically, is the greatest hindrance to a crop and could send prices sky-rocketing. Corn prices could double or triple!

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