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Inflation - friend or foe?

Agriculture.com Staff 09/13/2007 @ 7:45am

Grain markets are certainly teaching everyone a lesson this year in how much prices can move.

Wheat has hit historically high levels at $9 this week, and even though in last week's column (which seems an eternity ago) I talked about a blow off top in wheat, even we didn't anticipate it to be this high this quick! But here we are, coming off a $9 wheat price here in Sept. 2007.

The wheat market has snapped everyone's head back to attention on the grain Markets. Plus, corn looks conspicuously cheap now at only $3.50 - such that funds started plowing money back into corn today. Just one year ago today we couldn't hardly imagine corn spending any time above $3.50 (let alone 6 months), and now $3.50 looks cheap!

But much has changed since corn was $4, wheat $5, and soybeans $6. After all, now soybeans are $9, wheat is $6-9 ($6 next year, $8-9 now) and a $4 corn offer for 2008 & 2009 all of a sudden doesn't look like enough. Perspective is an interesting thing, it always changes with time!

Now the grain markets have to decide where to go from here. A few things to note in the USDA report today and the trade reaction from it:

1) Corn prices blasted higher on a very bearish report. While Pro Ag yield models suggested a 156 bu/acre crop, most analysts were well below that in their guesses. USDA came in at 156, and the market didn't even blink. In fact, rather than treat that as bearish news, we rallied 15c! Apparently everyone was waiting for the 'bearish' corn numbers so they could buy corn, and thus the higher price. When bearish news fails to push prices lower, the old saying is that the bottom is in. And all of a sudden, $3.50 corn is a bottom, not a top!

2) While corn prices gained today, there are some cracks in the 'Ethanol Armor' as USDA cut, yes, cut ethanol use 100 mb. Apparently plants aren't using as much corn and coming online as fast as anticipated. Some ethanol insiders suggest the actual number may need to be cut 400 mb or more, and this is only the first step. The fact that USDA took that step this early in the marketing year might be a sign of not just a crack in the Ethanol Armor, but actually a complete fracture. This portends badly for 2008 forward as you can already lop off 1 million acres from the 2008 needs.

3) The first sign of adjustment in EU behavior due to high wheat prices (a cut of 1.1 mt in feeding) and a substitution of other feedgrains. Its about time!

4) A reversal to limit down in wheat prices with a bullish report. When bullish news fails to push a market higher (and instead drops hard), the old saying is the tops is in. Bulls will have to prove this wrong, now, in wheat.

5) Hints of a smaller soybean crop - in spite of relatively strong crop condition ratings. Are the soybeans once again showing their poor yielding genetics?

6) Corn yields are rising (this was the largest Sept. yield estimate ever, and second largest actual), and it's only September. With better than expected harvest yields so far, isn't it almost a sure thing final yields will be above our old record 160 bu mark? If so, does it matter with smaller 2008 corn acreage likely?

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