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Grain bulls running wild in 2011?

Jeff Caldwell 12/29/2010 @ 12:50pm Agricultural content creator and marketer.

Ask anybody involved in Midwest agriculture what will be the biggest story in the industry in 2011, and volatile grain markets will be at or near the top of the list for most. And, though it's expected to seesaw for much of the year to come, there's reason to believe the year will at least start out on a higher note.

January 12 is a big date. On that day, USDA will release its final 2010 crop estimates and grain stocks reports for this month. With the latter expected to be on the low side, any downward adjustment to the prior could give bullish fuel to the corn and soybean markets, says University of Illinois ag economist Darrel Good.

"With small projected year ending stocks of corn and soybeans, modest changes in the production estimates could have a large price impact," Good says. "[The grain stocks] report provides the most information for the corn market since it allows a calculation of domestic use during the first quarter of the marketing year."

Will it last? Good says there are signs the bulls could stay entrenched as the year moves on, mainly because of sustained demand factors like ethanol. "Based on weekly estimates of ethanol production, ethanol use of corn in the first quarter of the year was 16% larger than use of a year earlier," he says. "The likely extension of the blenders' tax credit for another year suggests continued robust demand for ethanol."

Short grain stocks abroad will also keep the grains strong. And, unfavorable weather for wheat, corn and soybeans will keep grain traders' attention well into 2011.

"Unsettled weather partly influenced by the ongoing LaNina weather event seem to provide a very sound fundamental base for crop prices," Good adds. "Volatile, but generally high prices are expected to persist for an extended period."

But, don't completely rule out a slide in the trade in the next year, says University of Tennessee farm policy specialist Daryll Ray. With good planting conditions in the spring, it could be the start of the kind of crop that could send the trade slipping. "We are just an additional 'high-production' crop year away -- here and abroad -- from prices that could plummet to LDP levels, barring a rerun of a 4 billion-bushel cumulative increase in demand from somewhere," Ray says. "Prices can fall faster than they increased."

Ray cites overinvestment in agriculture as a potential bearish factor. If too many acres come into production in a good crop year, it could take away any bullish momentum in the grain pits.

"Farmers in the major exporting countries seeing the higher prices, will bring additional acreage into production," Ray adds. "To the extent that the resulting increase in production is not matched by increasing demand, prices will fall."

Still, the way grain stocks stand right now, Ray says it's tough to get too bearish anytime soon. "Prices earlier this year were falling until it became apparent that the U.S. corn crop was not going to live up to the expectations generated by excellent planting weather," he says. "As of now, the projected low level of ending corn and soybean stocks for the 2010 crop year, and short-term demand prospects, likely mean that 2011 will be a 'good price year' for corn and for major-crop farmers in general."


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