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Markets get shock and awe treatment

Agriculture.com Staff 04/02/2007 @ 3:05pm

Since September of 2006, the corn market has been marching higher as fears mounted about the lack of enough production in 2007 to meet the ever-growing ethanol demand. On Friday, those fears were apparently laid to rest as USDA's Planting Intentions Report definitely changed the mood in the corn market..

Projected corn plantings were 90.545 million acres of corn this spring, above the trade estimates of 88.061 million acres. In 2006, seedings were 78.327 million acres. USDA put prospective soybean plantings at 67.140 million acres, under the pre-report analysts' estimate of 69.167 million. In 2006 seedings were 75.522 million.

Do these numbers put a damper on the rest of the year for the corn market? Not just yet. I think of these numbers as Opening Day of the grain season. Just as you can't count a baseball team out based on the first game of the season, you shouldn't attach R.I.P to the corn bull market just yet.

For one, a lot of growing season lies ahead. However, more fundamentally soybean prices have been rising relative to corn in the last month, which could still sway planting decisions.

At the end of February, which was the time of USDA's survey of farmers for this plantings report, you had high corn prices and relatively flat soybean prices. The map below illustrates what the relative soybean-to-corn price was for 2007 fall delivery. Areas in green (which there aren't many), had a soy-to-corn price ratio of 2.1 to 2.5 while areas in yellow had a ratio of 1.9 or less. In other words, green areas tend to favor soybeans while yellow areas tend to favor corn. The grey areas were in between 1.9 and 2.1. Again, these are the price conditions that existed when USDA conducted their survey.

If you look at that same data today, based on Friday's closing prices after the report came out, you find a much different situation. Now, there is much larger area that is in green, signifying a more favorable economic climate for soybeans than there was last month. In Iowa, for example, the soy-to-corn price ratio jumped from 2.0 at the end of February to 2.2 currently. That's like adding an extra 70 cents on to the soybean price over that time period, while keeping the corn price constant.

Will these price adjustments lead to a big switch to soybeans? Probably not, but on the other hand it likely means that USDA's corn acreage numbers for corn may come down in future reports. One thing is for sure, volatility will be in full force this year and it will be important to monitor futures and your local markets for pricing opportunities.

Since September of 2006, the corn market has been marching higher as fears mounted about the lack of enough production in 2007 to meet the ever-growing ethanol demand. On Friday, those fears were apparently laid to rest as USDA's Planting Intentions Report definitely changed the mood in the corn market..

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