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How low can prices go?

Commodity markets have done a '180' lately, dropping significantly and making the
summer rally look like a flash in the pan.

Crude oil has dropped from $148+ on
July 11 to $55 today, a huge 63% price drop in just a manner of four months!
Wheat, corn, and soybean prices have followed, although not nearly as
dramatically as the crude oil move but significant nonetheless.

We sure spent a lot of time howling in pain as crude oil prices rose from $60 to
$148, but there isn't much rejoicing now that crude oil prices are dropping. It
used to be that stocks rose when crude oil prices dropped, but since our October
financial debacle (and the very public disclosure of US banking problems), lower
crude prices just seem to suggest lower prices for everything (stocks,
commodities - everything).

Corn has dropped from $7.98 on June 27 to $3.69 today, a full 54% drop in just a
little over 4 months. Soybean prices dropped 46% since July 3 (from $16.35 to
$8.855), while HRS wheat dropped about 38% (from $10.50 June 27 to $6.52 today)
while Chicago wheat futures dropped 46% (from $9.92 June 26 to $5.33 today).
These commodity moves have in large part been predicated by the huge drop in
stock values and financial stocks since our financial system went into a
tailspin in October. Once the US FED Chairman, the Treasury Secretary, and the
President talked about how bad our economy was so we needed a huge bailout, the
market just crashed. That could have been the linchpin in the stock blow up, as
well as the financial failure of many long term strong companies.

It's amazing what people's expectations can do to markets, but today there isn't
an analyst alive who thinks stocks (or commodities) can go higher. Perhaps this
is when one should be bullish??? Contrarians typically think that way, and in
this type of atmosphere the contrarians could be very profitable. Perhaps its
time to buy call options?

On the other hand, maybe we need to just find the price that we can make a
profit at with $55 crude oil, and inputs priced appropriately (relative to crude
oil, not a price gouging levels). What is that price now? With crude oil
dropping so dramatically, perhaps $4-$4.50 corn is now an acceptable price
again?

It's interesting to note that 1 year ago, prices weren't all that much different
in corn and soybeans than they are today. On Nov. 16, corn prices were trading
at $3.795 (only pennies from today's close) while soybeans were trading about
$9.95. While our memories are suggesting current prices are so cheap, they are
only cheap relative to the boom in prices we had into spring. Corn traded above
$6 about June 1, though, and only stayed above $6 for about 6 weeks before
falling down again. $4 corn is not a terrible price, and actually it might be
true that $4 corn and above might turn out to be a good sale for the next few
years.

It's time to turn our expectations lower as all commodities and all things valued
in the world have dropped significantly in value. The recent rally last year
might not be repeated for years, or even decades. When are markets going to
finally bottom? It may take a consensus among all commodities to find the value
that is acceptable and back in balance among commodities, but certainly $4 corn,
$10 soybeans, and $6 wheat might be OK given the right cost structure for
inputs.

If input costs decline, what is a decent price target for the next rally?
Corn's old highs prior to this year were around $5.50, while wheat rallied to
$7.40 or so in 1996. These might be price targets for a rally in 2009. But we
need to stabilize the financial situation and make people not think the sky is
still falling. Chicken little needs to be put back into its place, and not in
the financials pits of every stock market in the world.

Soybeans could be a bright spot, with $12.80 soybeans in the target of the old
highs in previous charts. While our recent memory is that prices can be a whole
lot better, by looking at historical charts, we can also remember that they also
have been a whole lot worse!

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
futures.

If you have questions about this column, call Progressive Ag at 1-800-450-1404,
or email ray at rlg@progressiveag.com.

Commodity markets have done a '180' lately, dropping significantly and making the summer rally look like a flash in the pan.

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