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Is the writing on the wall for edgy grain markets?

Grain markets are still on edge, even though the last two USDA reports have lessened the
worries over supplies.

USDA, on March 30th, said we were switching the necessary acres to
corn from cotton (3 million acres), HRS wheat (1 million acres), soybeans (8 million
acres), and adding another 3 million acres of land to grain production that wasn't even
planted last year. We also slowed livestock feeding of corn due to high prices,
effectively showing an even more important cut in feed use.

The April report Tuesday showed the impacts of the stocks report on US corn supply,
cutting feed use projections 125 mb, and raising corn carryout the full amount. This
effectively raised ending stocks 17% from previous levels, leaving a lot more
comfortable grain buyers for the rest of this year. And this might not be the last revision
to corn feed use! USDA also hiked South America corn and soybean production a bunch, and this
also raised world ending stocks of both soybeans and coarse grains. We won't be
running out of grain this year based on these numbers, so the edge should be off the

But is it? Actually, grain prices are hanging around the winter's highs yet, with cold
weather moving into the US Corn Belt in April and causing the first crop scare of the year
(a winter wheat freeze). Pro Ag models indicate we lost at least 40 mb of wheat last
weekend, and with the cold/wet weather continuing this week, the market is holding up
quite well so far. Witness especially the Dec08 and Dec09 corn markets, where prices
actually are at or even above price levels two weeks ago (before any of these reports were
out). So far, there doesn't seem to be much fear in 2008 or 2009 soybeans either, as both
are still trading at or above $8.20- near yearly highs. A few more weeks of cold/wet
weather, bulls say, and this market will drive sharply higher. The same bullish
enthusiasm started this week, too, after perhaps the worst freeze in a decade or more over
the weekend in winter wheat. But the open Monday was the highest price for the week so

Nearby contracts are weak, though, with the 2006 crop months and new crop 2007
contract months showing some signs of pending price drops, dropping below $4 corn and
$8 beans. Although prices haven't dropped much yet, we still are not far from $4 Dec07
corn futures (13c) and $8 Nov. soybeans (8c). We have spent only a few days below the
$4 corn and $8 bean level so far on 2007 months, but perhaps dropping below these nice
round numbers is an ominous sign in the market?

While planting delays and a cold April are getting some excited about a possible bull
market yet in grains, we note that large speculators and hedge funds have been busy
liquidating long positions in almost all grains the past few weeks. Hmmm, I suppose that
should make us think about their outlook for the next few months?

While it's possible that we may not get into the fields until May, one should not forget
that a 5-10 day planting window at the right time could make a great deal of difference in
grain areas. A couple 60 degree days in the Corn Belt could make quite a difference,
especially if excess water has run off topsoils during the recent cold spell. While it's
human nature with snow flying to assume planting won't start for weeks, sometimes
nature can surprise us in how quickly it can change. (For example, how much difference
from March were the first few weeks of April?).

Humility is not only a good attribute for wives and husbands, but also farmers and grain
market analysts. No one knows for sure what the 2007 crop will be like, and whether we
want to admit it or not, looking out our windows on April 11 isn't always a good
predictor of a crop for the year. Instead, a few tried and true methods might also help:

1). Unless weather is quite extraordinary, most of the time actual planted acres come very
close to March intentions.

2) Soil moisture levels on April 10 are often better predictors of crop yields than
anything. Currently, most of HRW wheat, HRS wheat, and Corn Belt areas have
adequate to surplus soil moisture. And this week's wet weather also fell most
significantly in the drier areas of the US (eastern KS, MO, Delta, and southeast US). If
the crop is planted timely (ie at average speed), trend yields might be 'low' estimates for
2007 crop yields.

3) In spite of freeze damage this week which dropped winter wheat yield estimates a
whopping bushel/acre in just the past week (or 40 mb), we still have a projected record
yield in winter wheat country (48 bu/acre yield potential). While that may continue to
drop next week as the freeze is further evaluated, it's still starting from a very high level.
In other words, does an above average (or record) winter wheat crop suggest that
corn/beans and all other crops still are likely to be above average?

4) Weak nearby cash markets, full carry in futures markets, terrible basis levels, and
sagging nearby futures markets (and bear spreads working) are all signs of a beginning
bear market.

5) "The trend is your friend" in trading. But when the trend turns lower, we don't always
like to acknowledge it as producers. With corn the leading indicator all winter, what is
the corn trend today?

We don't always have to be a 'tea leaf reader' to see the writing on the wall. And right
now, there might be more writing on the wall than we are willing to acknowledge. One
other major factor should be thought about as well, that prices (in spite of recent breaks)
are still at highly profitable levels, no matter what crop you are looking at. $5 wheat, $4
corn, and $8 beans aren't prices that are offered to producers long or often. Especially
when they were flashing the red incentive button to produce all you could all winter long
to farmers worldwide. Prices like that don't last unless a terrible crop comes not only for
the US, but also much of the rest of the world.

Betting on a disaster everywhere might not be a good play right now. Sometimes it's best
to just say "Thanks" to a recent rally like we've just had, and call it good. This might be
one of those times.

Grain markets are still on edge, even though the last two USDA reports have lessened the worries over supplies.

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