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Is this bull market like the 70's?
The bull market is alive and well, with new highs early this week and last
Friday in 2007 July wheat, Dec07 corn, and Nov07 soybeans. The dry weather
last week in winter wheat country sparked the wheat market higher on drought
concerns. Not to be outdone, corn and soybeans rallied as they do not want to
lose acreage to wheat in the coming year.
The acreage battle for 2007 is
heating up already in November, which makes one wonder just how intense its
going to be next March! After a big push early this week, markets softened
midweek (as they have done during most of this recent run higher).
The overwhelming feeling in the market is the realization that 2007 acreage for
corn may not be achievable to keep all demand fed, even with historically large
shifts away from soybeans (and possibly spring wheat). This problem is caused
by the increasingly large demand needed to feed the ethanol boom, which will go
from 16% of the US corn crop in 2005 to 28% in 2007 and likely 34% in 2008.
This is a large demand shock for the market to endure from 'fuel' in a short
time, a new source of demand for the corn market (not food or feed). The food
and feed demand remains the same (or higher with tight world/US current stocks). So, it is a problem which the market may have difficulty dealing with. Our own
USDA Chief Economist equates this demand shock to the Russian grain buying of
the early 1970's-a tremendous period of prosperity for agriculture.
If one looks closely at the price picture that emerged in the 70's, one has a
greater respect for the move the market could make in the coming year. During
those first few years of 1972-1973, wheat prices almost doubled their previous
price ranges (from $2.50 to near $5), pushed back under harvest pressure nearly to the old historic price highs ($2.75-$3), and then promptly doubled
them again a few months after harvest ($5). An equivalent move today would be
corn moving from its high this fall of $3.50, to a price near double that by
next spring ($7!).
While it seems impossible, since it has happened before, we
have to respect the ability of the market to do it again, however much a
longshot it is. If our Chief Economist, Dr. Keith Collins talks about the
similarities (he's never done this before), then one has to at least consider
the possibility of a historical price rally this coming winter.
Maybe one has to imagine for a minute what a rally like that would look like by
November of the year. Perhaps one would expect an unexpectedly large rally
during the fall. It's likely that some other commodities (say crude oil or
metals???) would have made some unprecedented market rallies as well in the year
prior to the grain rally (this also occurred in the early 70's). Funds might be
emboldened by seeing these other commodities double in value in a short period
of time, and be more willing to buy grains as well at historically high levels.
Maybe the US dollar will have flashed some signs of weakness as well (like a 20%
or more drop in the previous year).
Quite honestly, prior to the grain rally this fall, almost all of these tell-
tale signs had occurred. Perhaps most impressively, crude oil rose from $40 to
$80 (and stayed there almost a year), a new high price historically by a long
shot. With corn being converted into fuel prior to the crude rally, the energy
price hike spiked huge profits in ethanol production (as well as huge rises in
biodiesel use), propelling an explosion in ethanol and biodiesel plant
construction and potential use in the future. Perhaps this is the powderkeg to
light the grain rally?
While the rally the past 2 months during "harvest pressure" of a nearly record
large corn/bean crop was surprising, perhaps it's just an indication of things
yet to come?
There's little question that the market has already done a tremendous amount of
rallying to date, and all at a time frame way too early to guarantee acreage
planted for 2007 of any crop. After all, we are just barely finishing
harvesting of the 2006 crop. Most farmers haven't even considered their final
planting plans for 2007 yet!
Perhaps the break we are seeing in the past 2 days is needed, with a correction
typically healthy during a bull market. There is always the possibility of a
market top being formed at any time, so these breaks keep everyone on their
toes. It also forces those who like the current price to take notice of the
possibility that prices can go lower, too. And of course, if they don't want to
take the risk that prices will drop from these lofty levels, may want to sell a
portion of their crop. After all, that's what a market is designed to do, keep
us all guessing!
The key question today is, have prices rallied enough to allocate the short crop
for 2006, and attract enough soybean acreage to corn for 2007?
The bull market is alive and well, with new highs early this week and last Friday in 2007 July wheat, Dec07 corn, and Nov07 soybeans. The dry weather last week in winter wheat country sparked the wheat market higher on drought concerns. Not to be outdone, corn and soybeans rallied as they do not want to lose acreage to wheat in the coming year.