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Can grains keep on rolling?

Grain prices just keep on rolling higher, not impacted by a good start to the
2007 season.

It's fun to be a bull today, as no matter what the circumstances,
the bullish argument seems to still stick. First, it was delayed planting that
got the bull market excited, and kept grains from any meaningful decline. But
once it started drying up in the soggy eastern corn belt, planting accelerated
just in time so that during the crunch planting season, we actually moved ahead
of normal planting progress. Today, crop development is well ahead of even last
year's pace (and well ahead of average).

But, the bullish argument is still sticking. Now, it isn't because of planting
progress anymore as that is too far along. Now the bull argument is along the
lines of drought threats in the eastern Corn Belt, which actually to this point
has been the soggy area to begin the 2007 crop year. But a concerning weather
pattern (warm and dry) which seems to deflect all major storms is becoming a

The interesting thing is that the market is very highly rated right now, with
early planting an interesting combination to say the least. Currently the
Pro Ag corn yield model is well over trend at 156.5 bu or so, and also well
above USDA's current projection (which is slightly below 'trend'). So, even
though we still have an above average crop coming in the 2007 fields, still the
market is putting a premium in for weather problems (as of today we don't
have one).

It's an unusual situation! Last week we wrote about how great the start not only
in the corn crop, but also in soybeans, HRS wheat, winter wheat, and oats crop.
We currently have an above average crop not only of corn, but also winter wheat
(in fact, Pro Ag projects a record large yield), HRS wheat, barley, oats, and
just about anything producers raise. Yet prices keep on rallying.

Wednesday was perhaps a prime example. While corn crop ratings are still at very
good numbers (unchanged from last week at 78% G/E), still prices rallied.
Pro Ag winter wheat yield model numbers were up 0.25 bu/acre this week, adding
another 10 mb or so to total crop size the past week. Offsetting that somewhat
was smaller HRS wheat yield projections (down 0.6 bu/acre) but since winter
wheat has so many more acres than HRS, still total wheat projected production
was up.

So, why do grains keep rallying if the crops are currently so good? There are
really 2 explanations: 1) Anticipation of adverse 'drought' weather, and 2) Fund
buying amid little farmer selling. The first can be explained by the dry
eastern Corn Belt numbers. But still, the eastern Corn Belt crop is still
highly rated.

Fund buying amid small farmer selling might actually be a better reason.
Farmers seem very bullish after our winter rally, and they may be holding tight
to existing grain left in storage. Funds also still seem interesting in buying,
and continue to do so (even though they already own 2.5 billion bu corn, and 1
billion+ of wheat/soybeans). With funds buying and farmers still tight fisted
sellers, the market has no where to go but up.

The interesting side note to this story might come later, as if the crop
continues in good shape, eventually farmers will have 90 million+ acres of corn
to sell. At a current yield of 156.5 bu/acre, that would leave about 1.4-1.6
billion bushels of carryout in corn. If funds keep buying, this might be
available at a pretty decent price. Soybean and wheat production also will come
to market at some point (wheat much closer than soybeans), with wheat harvest
beginning in the next few weeks.

Current Pro Ag projections indicate a 48+ bu crop, so if it actually turns out
that large we could have a much larger carryout than currently projected (150-
180 mb larger), so bulls might have their work cut out for them to keep these
prices up IF the crop comes through. But so far, so good on the bull side, and
for now fund money is speaking louder than any current fundamental picture
offered by crop conditions or planting progress reports. With the top 100 funds
all trading 5-10 billion dollar or more each, just two of those funds can buy
virtually the entire 2007 wheat crop (and most of the soybean crop). Funds
could collectively buy virtually all the 2007 US corn crop. With that kind of
buying power, fundamentals don't need to mean anything in the short term, but at
some point will. The question is, when will that time come?

Grain prices just keep on rolling higher, not impacted by a good start to the 2007 season.

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