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The bull market in grains is alive and well, still running to new highs in corn. Prices are now a full three times their price just a few years ago (seems like an
eternity today)!

We hit my own personal target for a corn high in this
unprecedented market of $7.50 Dec08 corn today, a price no one deemed possible
even 5 months ago (or 1 month ago!). Yet here we are, and prices so far
haven't retreated at all or signaled that highs are in. But then, we won't
really get that signal until prices have already turned a major corner, (remember
wheat?).

USDA dropped the projected corn yield from one just shy of trend to now 6 bu
below trend, due to the unprecedented wet weather we have endured this spring
across the Corn Belt. Projected yields are now just 148.9 bu/acre corn, well
below 'trend' and nearly 400 mb below last year's production. Although still
early, USDA really cut the projected yield a lot for just June, with so much of
the growing season left. But perhaps they are seeing the soggy corn belt
disaster (IA, ILL, IND, MO) as being unable to be offset by improved yields
anywhere else - especially with a crop 1-2 weeks behind normal development.
Ending stocks could hardly get much tighter than already projected (now 673 mb
instead of 763 mb), but these are basically just pipeline supplies.

The markets
job now is to make sure we have enough corn on hand, so we are solving a
potentially huge problem by taking corn higher now. We've rallied over $1/bu
corn the past 2 weeks on the weather, but also following crude oil which was
running to new highs. Speculators are forcing the US markets to deal with
potential shortages now (remember wheat again???), so that we don't have to
endure the threat of 'no more grain' down the road. Even a bumper 2008 wheat
crop hasn't deterred feed grain prices much, as what difference will 100-200 mb
larger wheat crops make when corn production is being cut drastically. For the
first time in world history (we've been saying that a lot lately!), SRW wheat
went to a discount to corn prices in some interior US locations this week.
Basically, wheat is a feed grain just like corn right now!

While all seems impossibly bullish right now, that can change in a heartbeat as
soon as USDA wants it to. Are markets forcing policymakers to make changes?
One could argue that the market has no choice at this point but to get high
enough to require USDA to make a much stronger move than just allowing
haying/grazing of CRP land at an extremely late period (Late July and August).
Are we high enough yet?

The "market whispers" lately seem to be telling USDA to do something more
effective in providing feed grains supplies - and therefore solving this problem
longer term. With 32 million acres still in CRP in the US, prices need to go
high enough to allow earlier haying/grazing (like in June, not August!), and
maybe even new early-out rules as well. With a stroke of the pen, we could
change to a CRP hay harvest of June (or right now), with a 25-50% payment
reduction this year. That would clean off the trash for a perfect "early out"
program for producers (another 25-50% one year penalty?) - whereby crops could
be planted even this year in the South, and certainly next year in the whole
country. At $7.50 Dec08 corn futures, $6.82 Dec09 futures, and $6.50+ for Dec10
futures this might be acceptable to the public and even to many farmers
(especially livestock producers), as who wouldn't want the chance to grow $6.50+
corn for the next 3 years on virtually every CRP acre? And who can blame
them? This national resource should be used to improve the country's lot, and
with huge demand we can't just turn our noses away from the problem.

On a personal note, I can't see how wildlife groups can reasonably demand CRP be
untouched by policy moves (which so far has worked in Washington!). In the late
80's, North Dakota was gripped by drought, with little to no feed supplies anywhere and herd
liquidation likely (even for dairy) due to the shortage of feed supplies.

Haying/grazing at any time was allowed with a 25% payment penalty for first
cutting hay, with another reduction (12.5% by my recollection) allowed later on
the second cutting. I paid $12/acre roughly for the first cutting (money saved
by the Fed's in CRP payments and $6/acre for the second cutting for a total of
$18/acre. On 600 acres the government saved $10,800 in CRP payments, a direct
savings to taxpayers! Dairymen stayed in business by paying much less for hay
than they would have otherwise, likely leading to further taxing of dairymen
(another $10,800 for the government?). I made $40,000 net profit from the
venture (or about $67/acre profit), of which I paid 35% to the government in
taxes (another $13,000 benefit to uncle SAM), and I hired people who made even
more money (another $40,000 income and $10,000 in taxes?). Net, I calculate
the government got at least $40,000 ($10,800 CRP payment reduction, another
$10,000 dairymen taxes, $13,000 taxes on my income, and another $10,000 taxes
from my hired help wages/custom fees). On the entire 600 acres, I personally
cut that hay with an old IH swather, and I hit/saw one birds nest, and killed 1
pheasant with the cutter!

By my calculations, society/policymakers is valuing that pheasant at $40,000 ( in 1988 dollars, or about $100,000 in 2008 dollars) - a ridiculous valuation for
CRP wildlife! Reality in the countryside is always much different than
Washington lobbying or Ag committee hearings!!! Its time for wildlife groups to
face reality - their valuation method for that one pheasant is way out of line!
The government could and should stop this insanity - we are not being good
stewards of the land by listening to wildlife groups. It's time for Washington
to wake up the sleeping common sense of this country and put wildlife groups
back where they belong - and out of agricultural policy decisions! To buy a pheasant in
any real world costs is about $10 each (and that's overvalued, too!). Let's take
the money society would make and buy wildlife groups their own land for hunting
and stocking of game at reasonable levels, and make this world make some sense
again! The market is demanding it, and will get what it needs regardless of
wildlife groups longings. If $7.50 Dec corn isn't high enough, we might just
find the price that is high enough to force sense back into US policy.

How high
is high enough for common sense to kick back in at policy meetings at USDA?
We are about to find out, and Pro Ag thinks it will occur in the next few
days!

The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable. The
opinions and recommendations contained are based on our judgement and do not
guarantee profits will be achieved or that losses will not be incurred.
Recommendations should not be construed as an offer to buy or sell
commodities. There is substantial risk of loss in trading futures and
options on futures

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 1-800-450-1404.

The bull market in grains is alive and well, still running to new highs in corn. Prices are now a full three times their price just a few years ago (seems like an eternity today)!

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