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Sometimes the bug, sometimes the windshield

The old saying that sometimes you are the bug, and sometimes the windshield has
been reiterated in grains this week/month. Some markets got crushed (corn)
during the month, losing over $1 while soybean prices have hung in there pretty
well considering the problems going on in the corn market.

The USDA report reinforced this "some grains the bug (corn), and some grains the
windshield" (soybeans) perception. The report showed 2 million more acres corn
than expected, and 1 million less soybeans such that it was bearish corn while
soybean prices have been supported. Along with the increased planted acreage
than expected, the report mostly indicated which grain was the winner, and which
the loser in the market game for the coming year.

While soybeans lost a million acres in this report, making them more friendly by
the tune of about 42 million bu, the corn went the other way. 2 million more
acres means 300 mb more carryout, and even if USDA were to leave everything else
the same in the July report, we'd jump carryout from 1 billion to 1.3 billoin, a
30% increase. Not only does corn have to deal with the perception of more
acreage, it also has a crop condition index that is rated well above normal,
indicating a higher yield than average or 'trend'. While USDA has projected
yields in June below trend, our yield models indicate a yield increase from
trend, perhaps 157 bu/acre or so. That would also add to the carryout, and with
any cut in demand it wouldn't take much to push carryout to 1.5 billion, or even
2 billion bushels by the end of the 2009/10 marketing year.

Today, we have a soybean/corn ratio of 2.6 ($11.15 soybeans, 3.70 corn), quite
high on the traditional ratio between these two crops for harvest. The current
ratio is at the high end of past few YEARS of the recent ranges for the crops.
Soybeans are obviously being rationed in the current environment, while corn use
is encouraged and supplies are not really a concern right now. This is the time
when producers are encouraged to increase their production of the soybeans
(mostly which will need to be done by South American (SAM) producers). While
the current price ($12.50 beans, 3.50 corn) will only exist for the next few
weeks prior to the 2009 soybean harvest, the 2009 new crop ratio (Nov beans to
Dec corn) is one that will apply to prices for the next 16 months! It would be
extremely unsual for this ratio to hold that long.

That makes corn a non-sale today (and perhaps a buy for livestock/ethanol
producers) and soybeans a must sell product today. Of course, the current ratio
can be stretched further, especially for a short term situation. But in the
long run, something will be done by producers and users of crops to make this
ratio come closer together. The biggest producers making a decision about
planting next is the SAM producer, and he is likely to add considerably to his
soybean acreage at the expense of corn because the market is asking for it. For
the next few months while SAM is lining up his financing, he is staring at
incentives to produce soybeans and not corn. Guess what he will decide in the
end?

Yes, sometimes crops can be the bug, and sometimes the windshield. For now, the
time is for soybeans to have its day in the sun. But sometime, the
bug/windshield will change and corn/wheat will become the strong markets. For
now, the world turns around soybeans (as does the marketplace). So what do you
want to sell as a producer? The crop with the high price ratio (soybeans?). Or
the crop with the poor price ratio (corn)? This one is an easy choice.

While the whole complex is bearish corn right now, though, Pro Ag has noticed 3
gaps in corn in the past month's huge decline in price. Typically, the first
gap is called a breakaway gap, the next a measuring gap, and the final one an
exhaustion gap. Could it be that corn has now found its bottom?

Perhaps its time for livestock and ethanol producers to take advantage of good,
low corn prices (especially relative to soybeans). And book some 3-9 months of
use for now. This might really turn out well if weather continues to be hot in
the south, and cool in the north. Perhaps the worst weather possible for late
planted crops is heat in the south, and cool weather in the North. Yet this
week, this is exactly what we have. Worse yet would be heat in all locations
during the critical months of July and August, followed by cold weather in late
Aug/Sept and an early freeze in northern states. We couldn't ask for a worse
disaster for corn, and yet the market feels pretty comfortable with itself at
this time in corn. A buying opportunity?

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 judgment and do not guarantee that 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.

If you have questions about this column, call Progressive Ag at 1-800-450-1404,
or email Ray at rlg@progressiveag.com.

The old saying that sometimes you are the bug, and sometimes the windshield has been reiterated in grains this week/month. Some markets got crushed (corn) during the month, losing over $1 while soybean prices have hung in there pretty well considering the problems going on in the corn market.

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