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Searching for the market top

Agriculture.com Staff 06/13/2008 @ 7:16am

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.

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