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Fed rate cuts positive to commodities
The Federal Reserve once again cut interest rates this week for the second
time in 8 days, this time a 0.5% cut. Along with the historically large
0.75% cut last Tuesday, this is perhaps the largest cut we've seen in such a
short period of time in history. The Fed must be really worried about our
economy, as it almost appears to be in a panic mode to stimulate the economy
to prevent a rapid decline into recession.
For now, that might be considered bullish to commodities, even though the
soft stock market has been holding back commodities from any more rally since
last week. In fact, corn and soybean price charts are now at risk of sliding
into a short term downtrend, as if they drop to lower lows now we would have
established both lower lows and lower highs on charts. Wheat charts also
look daunting, as our dynamic downside reversal yesterday was followed up
with limit or near limit losses today. Typically, soybeans and corn are soft
this time of year, with the 'February break' typically from late Jan to early
Feb coming at about this time of year.
Yet, grains have gone up so much recently we were probably due for some
consolidating type trade. This has made for an interesting winter, with
producers looking at planning prices that are nearly double last year's for
wheat, up 50-60% for oilseeds, and up 25% for feedgrains (like corn).
Starting next week, we will begin to establish the revenue prices for spring
planted crops during the month of February. These prices will be very
important in determining what crops will be planted, so if there is an
acreage battle, it should start next week as many producers will take their
cues from the insurance established prices.
Bankers also are anxiously awaiting these numbers, as financing will be made
based on the guaranteed revenue producers can get. Once the insurance price
is established, an effective floor is placed on prices much like the loan
rate (or LDP) was the floor offered to all producers in past years. Except
in this case a producer has to buy the protection via crop insurance
premiums. Even though 40-65% of the premium is paid by the government, it
still is a choice for producers of what "floor" they want to put in, with
anywhere from 70-90% GRIP coverage offered (a group or county yield concept)
to 50-85% RA/CRC coverage (based on individual yields). Both types of
coverage are effective in putting price floors in place, while RA/CRC will
also put a floor under individual yields by each producer (and therefore farm
These price insurance protections will provide a solid safety net this year
given current high prices, as the 70% coverage level pretty much guarantees a
profit in 2008 - something that has never happened before. For once, a
farmer can cover all his costs with crop insurance at a reasonable premium!
The Fed's willingness to cut interest rates is a positive sign for
commodities, as it appears the Fed is willing to tolerate commodity inflation
for now in order to fight a sagging economy (recession). Their willingness
to cut rates during times of rapid commodity inflation is surprising, but
apparently they must know the seriousness of the problems confronting our
economy. They are using just about every lever they can pull - interest rate
cuts via the Fed funds rate and discount rate, printing and selling more
money into the money supply (via banks), and encouraging an economic stimulus
program by the legislative branches of government. There aren't many more
levers to pull to stimulate the economy!
Long term, this could lead to further price increases in commodities.
Already in the past few months, we've seen a number of firsts: 1) Beans in
the Teens, 2) Wheat in double digits (over $10), 3) HRS wheat prices at a
premium to soybeans, 4) Gold over $900, 5) Crude over $100, and 6) Corn
prices offered over $5 for 3 years out (2008, 2009, and 2010 harvests). Its
not often we see so many price obstacles fall in such short time frames, but
here we are, and its not even planting time yet!
Heck, we aren't even out of January, and we have the South American harvest coming up, USDA's Annual Ag Outlook in February, a USDA planted intentions
report the end of March, winter wheat emerging out of dormancy, and then the
beginning of the 2008 weather market once spring planting begins. It seems
like the 2008 crop is a long ways from being in the bin, with a lot of
obstacles yet before we can say for sure that we will build stocks from
pathetically low levels in both the US and worldwide. The market needs to
ensure that 2008 will include a stock building year for virtually all crops,
so the market has to do that job yet this year by making sure producers
produce more and consumers use less of nearly every grain. It doesn't seem
like January is a convincing month to believe we've done that job. In fact,
we might need multiple years of stock building years to get back to
comfortable levels of carryout cushions.
ut for now, the market looks soft. We'll see how long that can last, as so
far there doesn't appear to be many convincing reasons for grains to head
lower at this point. Especially with bullish action by the FED and US
policymakers to stimulate our economy at unprecedented rates of change in
interest rates. Stay tuned, as the commodity boom is still playing at the
CBOT theater, and so far its still playing to a sell-out crowd!
The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be
reliable. The opinions and recommendations contained are based on
our judgment and do not guarantee that profits will be achieved
or that losses will not be incurred. Recommendations should not
be construed as an offer to buy or sell commodities. There is
substantial risk of loss in trading futures and options on
If you have questions about this column, call Progressive Ag at 1-800-450-
1404, or email ray at email@example.com (return receipt requested).
The Federal Reserve once again cut interest rates this week for the second time in 8 days, this time a 0.5% cut. Along with the historically large 0.75% cut last Tuesday, this is perhaps the largest cut we've seen in such a short period of time in history. The Fed must be really worried about our economy, as it almost appears to be in a panic mode to stimulate the economy to prevent a rapid decline into recession.