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"TIGER" Marketing: $5 Corn, $3 corn or both?

Grains rallied once again to new highs in corn and soybeans this week, pushing into the $4.20 area for Dec corn and well over $8 now for soybeans. It's still the ethanol plant construction at unsustainable rates that makes the grain markets so exciting.

USDA is projecting a 50% increase in processing capacity for ethanol (1.05 billion bu) for the 2007 crop year, a huge construction program in just one year. This new demand is just too much for the market to absorb in one year, and creates the need for an unprecedented rally in 2007. This already began at harvest 2006, and so far has continued to this

It may be naive to think the rally will end in February, as usually markets with
this type of need to ration demand/provide incentives to plant in the coming
year continue into planting. It may very well remain the case in 2007 as we
need to ensure some type of carryout comfort in the coming year for corn. The
attractive corn price is also driving all other markets higher as well.

Could we see $5 corn yet this spring? This is certainly a possibility, and Pro
Ag leans toward the probability of both $5 corn this spring, and even sub-$3
corn by this fall if the market does its full job this spring/summer. We need
to first ensure the rapid acreage expansion of corn needed this spring (will $5
corn do it???), and then with a good harvest prices could retreat sharply to
punish those that didn't price it on the big spring rally (which enticed the
corn acreage in the first place). Of course, the predictability of this type of
market is not strong, with weather playing a large part yet this year. But both
$5 and $3 corn are possible this year, and it's also possible we will see both by
harvest (in fact, the market probably needs to do both to really do its job this

This creates some huge opportunity for aggressive growers, especially given the
$4 Feb. price almost assured for the crop insurance revenue guarantee. Growers
can use this Feb. price to lock in risk protecting revenue guarantees, thus
eliminating most of the risk in producing the 2007 crop. Then with most of the
risk gone, this will allow farmers to hold off on pricing additional crop until
we rise well above the Feb. price guarantee (which we think is most likely at
planting time). At that point, locking in near $5 corn might be too good an
opportunity to pass up. If the market does its job (rallying enough into
planting), we should get the necessary acreage which will allow prices to drift
much lower into harvest (with a good crop yield). At that point, 80% CRC/RA or
90% GRIP may trigger claims on almost all crops (unless a huge bumper crop is
produced) if prices drift below $3 at harvest. This could be a huge windfall
gain for producers, collecting $5 for the 2007 corn crop AND collecting crop
insurance indemnities if prices drift below $3 - a true ''double dip''.


Note the plan stated above includes using revenue insurance to HOLD OFF on
winter sales, not pricing grain until near the end of the spring rally. While
most insurance agents (with little market savvy) are advising pricing grain early
using revenue insurance (the call side of the revenue protection), instead until
spring Pro Ag would advise using the put side of the revenue insurance to hold
off on pricing until we exceed the Feb. price guarantee by some amount (10%,
20%, or 30%) so that we can participate in whatever spring rally occurs. This
would use all the market opportunities present, but would take an aggressive
marketing style to pull it off. This "profit push" marketing program is for
tigers, not little lambs, as the market will likely be full of treachery yet
this spring. We will take some risk into planting, but in reality most of the
risk is already protected by the revenue insurance protection bought at high
levels. We see this as the ''true'' marketing opportunity, but it does take some
price risk into the traditional spring market topping area.

This "Tiger" Marketing Plan is not a risk reducing plan, but a risk taking marketing plan. So far risk taking has been exactly the marketing plan that has worked the past 6 months. Risk takers have been rewarded with much higher prices for almost all commodities, but the leaders have certainly been the corn market, followed by soybeans. But as we always say, "Past performance is not indicative of future results", so if you accept this risk you accept both the good and bad that could come with it.

The "Tiger" Marketing Plan for soybeans might be to not sell any soybeans at the $8 price area, but instead waiting until prices go up 20, 30, or 40% (note the soybean targets above corn) above the February base price. For example, the first sale at 20% over the Feb. price of $8 would be at $9.60 Nov. beans, where a producer could lock in a 50% minimum price with a put option strategy. At 30% over the Feb base (around $10.40 Nov), a producer could buy puts on the remaining 2007 crop. At 40% over Feb. base ($11.20), a producer could flat price 50% of the crop.

At 50% over base ($12), a producer would flat price remaining 2007 beans and now be 100% flat priced -and unable to participate in any more soybean price rally. But the reward for delaying pricing decisions would be averaging $11.60 for flat priced beans, and owning some puts in case the market ever crashed. The risk is that none of the targets would be reached, but then it would take some quick thinking to change gears and get something priced before the bottom falls out. Today, that doesn't seem possible for either corn or beans. But crop insurance protection would eliminate the need to risk the farm on this "Tiger" Marketing strategy. In other words, it gives you courage to speculate longer on higher prices into spring.

Some deadlines could be put into place to prevent speculating beyond July, and maybe even earlier deadlines for corn (perhaps before the end of June - planting acreage reports?). The selection of price targets to add price protection and how that protection is added might be a function of how high you think the market can go in 2007. The targets above are $5.20 Dec corn and $12 Nov. beans. If you are less bullish, lower targets could be set. If more bullish (and greedy), even higher targets can be set. Know your risks, price probabilities, and your potential rewards. For now, this risk does seem justified based on market performance to date!

Grains rallied once again to new highs in corn and soybeans this week, pushing into the $4.20 area for Dec corn and well over $8 now for soybeans. It's still the ethanol plant construction at unsustainable rates that makes the grain markets so exciting.

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