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Nosedive in the grains?

Last week we talked about the impending retreat in grain prices for wheat, corn, and soybeans. That following weeks where we indicated soybeans sales above 14.90 January, and corn sales with March corn above $7.60 were some excellent sales levels for 2012 crops. Quickly, corn prices have retreated 60c and soybeans as well on virtually no news in the markets. In fact, with cancellations of U.S. soybean exports recently by China, even with some dry areas in Brazil in the northeast, prices still retreated.  

Recently in our daily column we wrote about how the "fertilizer" of high prices may be impacting the markets, allocating the short supply of grains in 2012 production years and also spreading that same fertilizer around the world's producing region for the 2013 crop year. That magic of the invisible hand of the market may also be impacting us IN SPITE of a terrible production year in 2012 corn. We pondered the impact of a normal crop or better yields returning with the strong incentive to produce more acres and intensify efforts on those acres across the world.  

Today's market showed another sharp retreat on Informa's projected 99 million acres of 2012 U.S. corn, with 79 million acres of soybeans estimates. Apparently, farmers are paying attention to the soybean/corn price ratio, which strongly favors planting corn over soybeans in 2012. With a return to normal trend yields, we end up with a much larger production of corn and soybeans. Where is the demand to mop up that extra production?

Market wannabes continue to ponder how this can happen. But whatever you do, do not underestimate the ability of the U.S. farmer to produce when the market demands it. Sure, there are some dry areas in parts of the western U.S. (particularly Nebraska, South Dakota, and Kansas). But much of the eastern Corn Belt and Southeast were healed of moisture shortages by fall rains (and hurricanes) that relieved drought conditions there. Weather is always unpredictable, and perhaps watching South America's production prospects this year (with estimates starting to creep higher for Brazil) is having an impact on our impressions of whether we can rebound from drought.

Yes, it is possible for production to rebound.  And to imagine a large crop like 5% or 10% above trend yields is astounding when you consider the productive machine of the U.S. farmer. So indeed, the market does need to consider a number of possibilities next year.

Woe to the farmer holding cash grain expecting things to get ever better as the season wears on.  It's one thing to hold $4 cash corn hoping for a price increase. It's another to be holding $7 or $8 cash corn hoping for a price increase!

Pro Ag has a long-standing concern that corn priced above $6 (yes, that is a 6!) is priced above what the market will bear as evidenced by the experience in 2008, and the tumbling market that ensued in the dearth of our financial crises of 2008. It's been a long time since we've seen corn prices below $6. Pro Ag is wary of the "fertilizer" of high corn prices, and Informa dealt us another reminder of how that works. One only has to look at what land prices have done at current price levels to be aware of the terrific incentive to produce under the current price structure.  

Perhaps it won't be long and we will be trading 2013 corn over $6, and $13 2013 soybeans may not last either. These are still historically high price levels. We may be wishing for these price levels again if we quickly fall below these marks.

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