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Do not panic during Euro debt crisis

Most likely the 2012 corn yield will end up between 145 and 165 bushels per acre. Odds favor a better-than-trendline yield in 2012. And with 95 million acres, we could end with a large crop and lower prices by the fall of 2012.

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During one of the early winter Euro debt crises (I count 12 so far), panic went through farm country.

I use a series of rules to put together a master market plan each year, and I try to envision what scenarios are likely to unfold. I look at what could be bullish or bearish for prices in the next one to three months; I also like to look out at prices and scenarios for the next 12 to 24 months.

To be honest, I did not envision the sovereign debt crisis developing in Europe and the large negative impact it would have on the global stock and commodity markets.

I have often said you only have to worry about two things in the commodity markets: the things you can anticipate and the things you cannot anticipate.

This was one of those economic crises that I did not anticipate.

I have also learned that large moves in the grain markets can set up great opportunities for those who are positioned correctly.

The nations in the European economic community take less than 10% of the U.S. farm exports. As their economy has slowed, it has reduced consumer demand for everything from clothes to cars. So far, it has not had a major impact on U.S. farm exports.

This crisis has created an atmosphere of fear and uncertainty that I would compare to the grain embargoes in the 1970s and 1980s. A crash in the European economy this year would be the most well-advertised crash that I have lived through.

The attitude is bearish, and farmers are willing sellers on any short-term rally in the grain markets. Many farmers are willing to sell cash crops, 2012 crops, and 2013 crops ahead at the same time. This could be a huge mistake.

So what can turn this around? I look back over the grain markets during the last four decades. I have seen a lot of years when attitudes and prices change dramatically the first week of March.

Trade attention will change from European financial problems to crop conditions in the U.S. by the end of March.

The corn table on this page and the soybean table on the next page show the extremes of what carryout could do this year as you plug in different yield scenarios for 2012.

3 Corn scenarios

Following are three different corn-yield scenarios and what kind of prices could result.

(Note: I am projecting U.S. corn planted acreage at 95 million acres in 2012, which would be up 3.1 million acres from last year. I am using carry-in estimates of 850 million bushels.)

“I have often said you only have to worry about two things in the commodity markets: the things you can anticipate and the things you cannot anticipate.”

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Most likely the 2012 soybean yield will end up between 40 and 44 bushels per acre. If beans end with a national yield of 43 bushels per acre or higher, look for soybean futures to drop to below $10 per bushel by the fall of 2012.

  1. Low Yield Scenario. If I look at the lowest yield scenario, it would be for a national yield of 145 bushels per acre, a total crop of just 12.6 billion bushels, and ending stocks dropping to 223 million bushels.

    Under this scenario, corn futures would go to new all-time highs (at least for a few days) before extreme price rationing would start, and corn prices would move sharply lower by the fall of 2012.

  2. Normal Yield Scenario. If I look at a normal yield next year of 155 bushels per acre, U.S. farmers would harvest a crop of 13.3 billion bushels, with ending stocks increasing to just over 1 billion bushels.

    In this scenario, corn prices would likely drop to below $5.50 per bushel by the fall of 2012.

  3. High Yield Scenario. If we get a slightly larger-than-trendline yield of 165 bushels per acre, U.S. farmers would harvest a record corn crop of 14.4 billion bushels. December 2012 corn futures would likely drop below $5 per bushel.

3 Soybean scenarios

For soybeans, look at the following three yield and price scenarios and what kind of prices that could result.

(Note: I am projecting U.S. soybean acres at 77 million acres in 2012, which would be up 2 million acres from last year.)

“In all of my corn and soybean scenarios, I would expect higher prices by this spring and summer, and I look for lower prices by the fall of 2012.”

  1. Low Yield Scenario. If you use the lowest-yield scenario, it would project a national yield of just 40 bushels per acre. The total crop would drop to just 3.040 billion bushels, and ending stocks would drop to less than 70 million bushels. In this scenario, soybean prices would test or move up to new all-time highs.

  2. Normal Yield Scenario. If I plug in a yield of 42 bushels per acre and a crop of 3.192 billion bushels, then carryout increases to a more comfortable 172 million bushels. This would likely take prices back up to $11.50 to $13 during the spring/summer rally.

  3. High Yield Scenario. If I use an optimistic yield of 44 bushels per acre, the total crop would increase to 3.344 billion bushels.

In this scenario, ending stocks would increase to 324 million bushels and new crop soybean futures would likely drop to below $10 per bushel.

A final thought

In all of my corn and soybean scenarios, I would expect higher prices by this spring and summer, and I look for lower prices by the fall of 2012.

I think we can end up with a large crop in 2012; I just want a good weather scare this spring to get the new crop sold ahead. When the news is super bullish and it looks like it has to go higher, I advise my clients to remember how they felt last winter and to stay disciplined and be ready to sell. 

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