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How low can prices go?

Agriculture.com Staff 11/13/2008 @ 9:07am

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.

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