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The purpose of blow off tops

Agriculture.com Staff 06/20/2008 @ 6:34am

The possibility of a blow off top in either corn or soybeans (or maybe both) this month seems large given recent market behavior.

Corn futures have rallied about $1.30 in the past two weeks while soybeans have jumped $2+. These kind of moves cannot be sustained by the markets as there just isn't enough time for users/suppliers to adjust. Why do blow off tops occur?

Blow off tops accomplish something that the market has not been able to do via a typical rally. While a typical rally doesn't get the attention or eyebrow raising reaction from the world (users, suppliers, the media, and government officials) and thus changes in behavior of those participants, the blow off top phase of the market does. This accomplishes a lot of things a typical rally cannot, and it seems while allocating short supplies cannot be done efficiently in a typical rally market, it seems the blow off top phase does get it done.

The above words might not mean much until you put an example to it. HRS wheat prices from 2002 to this past winter was a case in point. Users and suppliers watched as it took from the 2002 breakout point of a $2.50-$3 price range to rally to $5 by 2006 (4 years). It took another 12 months for HRS wheat prices to move from a $3.50-$5 range, and then another 7 months to rally to above $10.

During all of these price moves, users and outsiders thought HRS wheat producers would surely respond to the price rallies by producing more, and users using less of this product. But it really didn't happen. In fact, HRS producers were actually switching acreage away from HRS wheat to corn/soybeans due to variety improvement in corn/beans and roundup ready technology which made it much easier to produce corn/beans vs. wheat.

Producers had also just experienced the 1993- 2000 period, where head scab had made wheat production a much riskier proposition. Producers used to think wheat production would provide 50 bu wheat with your eyes closed - just plant it and the crop will come. Head scab changed all that, as yield ranges went from 40-50 bu/acre to 0-50 bu/acre in top wheat producing areas. All of a sudden, corn and soybean production were less risky ventures than wheat, and the fungicide application to wheat for scab was costing $5-20/acre - effectively taking 2-5 bu/acre off the profit side immediately to pay for the fungicide. While wheat production got more difficult, corn production became routine to get 150 bu/acre corn (from 8 or 10 years ago), and the world of producers was irreversibly changed. Economics changed as the perceived world wheat producers operated in changed environments. How could the HRS wheat market get producers attention??? The blow off top which took prices from $10 to $25 took just 2 months!!! That turned many producers heads, not only in the US but in the entire world. Wheat production looked profitable again, and the world responded in earnest as wheat acres jumped considerably in 2008. The blow off top got everyone's attention, making producers want to produce more and suppliers to switch to other sources of protein (wheat gluten?). Human behavior changed, HRS wheat shortage solved!

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