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Fed rate cuts positive to commodities

Agriculture.com Staff 01/31/2008 @ 9:40am

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 revenues).

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!

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