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The purpose of blow off tops

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!

Note in HRS wheat how blow off tops accelerate each price rise, with prices
moving higher, quicker in each stage. The heads of market players also change,
as the psychology of different groups emerge and meet in the marketplace.

Speculators (think spec funds) purpose in life is to educate the world about
what is happening in it, forcing everyone else to accept their view of it before
they change it (just when you believe $25 wheat is possible or reasonable, then
it drops to $10 in 2 more months!). By buying and controlling the HRS wheat
market with huge long positions and catching shorts unprepared, they were able
to blow the market much higher than anyone could imagine, with the final
dramatic stage (think the move from $10 to $25 in 2 months) making us all
believe the unbelievable. HRS wheat will never be worth over $15, let alone
$25, right? But once it ran to $25, we all had to believe it. When we did,
prices dropped below $15 almost immediately!!! When the unbelievable becomes
reality, funds are essentially done with their play as they've accomplished
their purpose. If not for fund traders, who would have believed that users
would pay $25/bushel for HRS wheat? Or, that they would pay $10/bu premium to
soybeans for HRS wheat? Or, that HRS wheat was worth 2x as much as SRW or HRW
wheat?

When the unbelievable becomes reality, blow off tops are usually done
and the world looks at the market of a blown off top differently than it did
before. The lesson taught in HRS wheat is that its worth whatever someone can
believe it is worth, and perceptions change with time. Most of us (99% or more)
are simply price followers, and a few (1%???) are price makers. Funds were
price makers in HRS wheat last February, and they forced us all to accept that
anything could happen to HRS wheat prices, as the impossible became reality, and
then reality became possible again (<$10 wheat)!

Corn seems closer to the 'unbelievable' now than any other crop, as corn is now
at a premium to SRW wheat. But perhaps $8 corn is similar to $10 wheat? What
next can happen to corn? Can we do the blow off top in the same dramatic
fashion as HRS wheat??? If so, it becomes difficult to put a topside in the
market, or even measure one. Inflation adjusted highs in HRS wheat were $24,
and we hit $25 in the 'unbelievable' stage of the rally. Inflation adjusted
highs in corn fall around $15/bushel, while soybeans is actually closer to
$40/bushel. So the top for corn could be anywhere in between $7.91 (this week's
high) and $15, and soybeans between $15+ (this week's high) and $40. But
remember, the spike from $8 to $15 ($15 to $40 in beans) may only take 2 months
or less, not years. Psychologically, the market will blast all perceptions if
the blow off top occurs.

In the past 2 years of corn rally, USDA has continually announced no intention
of using CRP early out as a solution to the problem. Yesterday, USDA spokesman
were saying the CRP early out consideration is being accelerated (meaning an
announcement is imminent???). Pro Ag has been saying for almost 12 months that
every time USDA said they won't open CRP, the market (think funds) is just
saying "we need to go higher". Perhaps when the CRP announcement is made, then
funds will finally decide we are high enough!!! Ironically, while governments
and politicians like to believe they control markets, instead markets might
control governments (the market goes up until government policy changes), and
therefore the market accomplishes its purpose which is to make people change
what they do. HRS wheat producers planted more, HRS wheat users used less, and
the rest of the world learned the real value of HRS wheat. Is this finally
happening in corn/beans??? If so, then the blow off top is occurring, and is
nearly done!

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 judgement and do not
guarantee 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.

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's
common sense marketing services, call 1-800-450-1404 or email
Kristi@progressiveag.com.

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

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