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Some problems in bullish-land?

It’s been fun looking at nothing but positive finishes in grains recently, with
wheat leading a rally that has left most everyone shaking their heads. Corn and
soybeans have been following, and everyone is feeling pretty good right now.

Then Tuesday came along, and limit losses in all the grains left a bad taste in
many bulls’ mouths. Hedge funds have been known to do a few of these 'false
tops' in the past. Though it still might be a little early to call them
tops. We note that some marketing firms are expecting a multi-year top to
possibly form here for wheat, and certainly $9.50 is high enough for that to
occur.

But corn is showing signs of spoiling the bullish run, with a crop size that
might be approaching a record large crop. Pro Ag yields have been hovering from
157-159+ recently, and so far harvest results suggest it might even be better
than that. It was not a perfect corn season everywhere, though, and that is
what is most impressive about yield results this year. It seems there is no end
to how good the corn genetics seem to be getting. Even far northern ND is
reporting yields of 170-180 bu corn, which might be a good 40-50 bushel higher
than ever achieved there! Perfect years sometimes do that, with some huge
yields reported in areas where things were looking good most of the year. Even
areas that received little rain during the heat of summer are reporting some
decent yields, keeping the overall national average very near the previous 160
bu/acre record large crop.

Soybeans don't seem to be quite as good, but that didn't stop FC Stone from
guessing a 43.0 bushel/acre crop for 2007 in their October guess. That's quite
a bit higher than Pro Ag would have suspected, as our yields are closer to the
42 bu area. Given that soybean yields haven't been nearly as impressive as corn
thus far, we'd be surprised if USDA comes close to that type of yield hike from
the Sept. report (only 41.4 bu/acre).

Regardless of this week's price action, it could be a tough winter for grain buyers, as it appears we won't have enough acreage for the 2008 crop year. Corn
acreage might be adequate if we have a 2 billion or higher carryout (which seems
likely with big crops and slowing ethanol demand) - even if we lose 4-5 million
acres to soybeans. But soybeans and wheat still appear to be short of acres, as
we might need an additional 5-7 million acres of these crops than we are likely
to get (even with the 4 mln bean hike and 1-2 million wheat hike in acreage).

So, we are left with a possible bidding war between wheat and soybeans for acres
next year, with corn not able to drop too far, too fast or it risks losing some
of the necessary acres it needs as well. That doesn't mean we won't likely see
some breaks in the grains at times this year. And maybe corn can even sustain a
deep break at harvest with the very large crop coming in and people struggling
to find a home for it all (depending how large it actually is). But it still
seems unlikely to break significantly on the new crop months, especially once
the crop is all in the bin.

Wheat seems to be the crop where the market is almost becoming non-functional,
with a "little" 42c trading range Wednesday on virtually no news. That kind of
volatility is hard to find in wheat, but here it is. Could it be that hedge
funds (who pay 100% for commodities when they buy them) are trying to shake off
some weak hands? From Monday's high to Wednesday's low, we had a 55c loss in
virtually 24 hours - not a market for the weak of heart! With bull spreads
still working in wheat, it might be a sign this bull market is not yet ready to
give up.

You have to hand it to the grain markets - it is not letting anyone fall asleep
this year while watching them. While trouble seems ahead for corn, it might not
yet have arrived for wheat and soybeans.

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.

It’s been fun looking at nothing but positive finishes in grains recently, with wheat leading a rally that has left most everyone shaking their heads. Corn and soybeans have been following, and everyone is feeling pretty good right now.

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