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Inflation - friend or foe?

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?

Funds appeared to be swinging the big bat today, bailing out of wheat after
massive profits the past 3 months. It appears they are pouring that money into
corn now again, as corn appears cheap relative to other commodities. Already,
many are suggesting a loss of corn acreage to both wheat and soybeans, and we
hardly even started the 2008 planting season yet.

It's amazing what 1.3 billion bushels of wheat can mean, especially when we are
short 200 mb from normal US 'carryout'. Adding the funds long 1.3 billion
bushels to the 200 mb shortage, we increase the problem by 6x (making $9 seem
cheap). And surprise, surprise, when funds spit back out the 1.3 billion bu, we
just might have a surplus! Is $5 or $6 wheat cheap enough if funds spit out
the entire $1.3 billion?

If you haven't been impressed by the volatility yet, you probably need a medical
checkup! So far, inflation in grains has been nothing but a blessing for
farmers, as the general inflation level cannot keep pace with 25-50% yearly
price gains, and thus more money flows in to farmers pockets (for now). But
beware, as after 3-5 years of astounding gains, typically the whole cycle
reverses itself, and we may just find ourselves on the wrong side of the
inflation equation (much like 1978 to 1987). There will be a period with costs
rising, interest rates high, and land/machinery/grain prices dropping like a
rock. Enjoy the ride for now, as it will probably remain as joyful as it can
ever be in agriculture for a few more years. Just remember that all good things
come to an end.

Ray Grabanski is President of Progressive Ag, a marketing and risk management
firm for farmers located in Fargo, ND. For questions or comments, or if you are
interested in more information about Progressive Ag services, call 1-800-450-

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

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