Grains seeking new highs
Grains resumed their bullish bias in the past week, led by Mnpls HRS wheat futures as spring wheat hit the $10 level for the first time ever.
Soybeans followed that rally by pushing to new highs as well, with new crop corn running near the $4.50 mark. The only grain markets that have not run to new highs are old crop corn and old crop SRW Chicago wheat futures.
These new, higher price levels seem to be reached with little effort, as grains seem to go higher about 5 days for every one day prices close lower. Money continues to pour into commodities as investors see the high returns in grains over the past year (estimated at 25%). A DOW Jones wire report this week indicated investors at a conference in New York continue to be bullish grains. Many expect that trend to continue for at least 5 years, a possibility that makes grain buyers flinch.
The US Federal Reserve this week cut interest rates another 0.25% down to 4.25%, indicating they are willing to accept inflation for now in order to battle the financial crises in the housing sector. The FED doesn't want home prices to continue their downward spiral, and thus jeopardize more homeowners to be subject to foreclosure. Their alternative is to try to pump money into the economy with lower interest rates. Wednesday they upped the ante by announcing they were also planning to Auction $40 billion dollars off next week to try to pump up the money supply. This is part of a plan with other world central bankers (Swiss, EU, England, and Canada) to try to deal with the global credit crunch, an unprecedented event. Apparently they feel the cut in interest rates was not enough to increase consumer confidence.
Adding to the bullish enthusiasm is the new, higher projected 2008 prices by some financial services speculative firms (including Goldman Sachs) of over $5 corn, $15 soybeans, and $7-8 wheat. The market didn't take long to react to this report Tuesday, with new price highs for most new crops. We now have new crop 2008 wheat at $7.75 to $8.75 per bushel, corn at $4.50/bushel, and soybeans at $10.75 and these numbers seem to be rising every day. We aren't anywhere close to the time frame where these markets should be bidding for acres, and yet we continually run to new highs each day.
More and more we are hearing of calls for much higher price targets by next spring, something that usually would occur seasonally. But also corn prices at $4.50 accompanied by huge discounts for ethanol relative to gasoline could present some demand changes for corn. Ethanol plants simply cannot make money at current price relationships, with these numbers getting worse as you move into next summer (corn at a premium price near $4.50 futures vs. $4.10 now). Obviously, there would be some shutdown of ethanol plants sometime in the next year if price relationships stay where they are at. If so, corn ethanol demand or use could be cut significantly as we enter the last half of the year.