Summer tops are in?
Last week, I mentioned the possibility of potential tops in markets, including corn and soybeans, where the weekly downside reversals looked formidable.
Soybeans, however, rallied above those levels on an acreage report that was a shocker to traders. Perhaps, the report revealed the American farmer's logical decisions (planting more corn and less soybeans). That shouldn't have been a surprise to most farmers, as the $100/acre PURE PROFIT (over costs) advantage of corn over soybeans made it more like a no-brainer to plant more corn-it was just a matter of how much. Clearly, American farmers are no dummies!
Pro Ag correctly anticipated this phenomena by selling 100% of 2007 corn, 50% of 2008 corn, and at least 40% of 2009 corn before this report- a wise decision indeed! We also delayed sales of soybeans until Tuesday (the price peak thus far), in spite of 2 weeks of downside reversals - why? Pure profitability logic! We knew soybeans would eventually become at least 2.3x the price of corn (or farmers wouldn't plant it), and this week we were sellers of soybeans at 2.5x the price of corn! Yes, logic does work, and the American farmer is perhaps the best agricultural businessman on this planet! Did you heed some of last week's Pro Ag warnings: "With very high prices right now, we doubt the market will give farmers the chance to harvest at such lofty price levels. If you don't already have any grain (wheat/corn) needed to be sold at harvest priced, you may need to get busy doing some marketing!"
Today, just 2 trading days removed from report day, corn is looking like a very tired market, with prices now almost $1 less than just 2 weeks ago when that top was formed! With a decent corn crop (our current projection is 153 bu/acre), its likely corn carryout will be 1.75-2 billion bushels -2x USDA's current projection! The supposedly impossible supply/demand situation to solve has been solved!
The American farmer is a master at responding to market forces and providing the supplies needed to meet demand. While you can likely put a fork in this year's corn market (it is done!), perhaps the most bullish long-term impact for corn is that we have solved this year's supply problem for those considering construction of highly profitable ethanol plants. It's got to be reassuring to know the American farmer will respond to $3 cash corn by growing all you want- especially when break-even to produce ethanol is closer to $4 corn! That might be the most positive development in agriculture for decades!
While that is very positive long-term, the Cinderella fairy tale ride of higher prices might be over for a few months as 2007 harvest is underway of a very good US wheat crop. Corn and soybeans appear to be right around the corner, with cool/wet weather forecast for the entire Corn Belt in July. This is perfect weather for pollination of corn and soybean development.
If the forecast is right, we may be looking at bumper corn (160+ bu) and soybean (43+ bu) that could give us closer to 3 billion bu corn carryout, and 350 mb soybean carryout (instead of the 200 mb currently tossed around). Ethanol investors can plow money back into ethanol, and the 2008 bidding for acreage can begin as soon as this year's harvest is done.