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Will the grain price inflation last?

The big question on everyone's minds today is the big price move higher during harvest, and whether that price inflation will last?

Currently, producers can contract 2007 corn for $3.50 futures, which equates to well over $3 cash prices locally in almost every location. This is a huge price increase from last year, when $2.40 futures were projected for harvest 2006, and current cash prices were barely $1.60 in many locations. What a difference a year makes, with most of the price movement occurring in just the past 3 months!

While corn prices have risen 68% so far in 2006, other commodities have not fared as well with wheat up 47% and soybeans up only 9.5%.

There is no question that producers are very interested in growing more corn in 2007, with the Pro Ag guess that we probably have farmers planning on about 6-8 million more corn acres in 2007 at current price relationships. Of course, price relationships in December don't matter much (unless you are selling them or buying). Instead, its price relationships in Feb/March which determine the majority of farmers planting intentions, and unfortunately we won't know that until at least a few more months go by.

While soybeans have been the dog of the grains, it wasn't that many years ago that a 9% hike in commodity prices would have been a pretty good accomplishment in one year. No more, as we've seen huge price moves in commodities the past few years. The biggest ones have been crude oil and metals, and even this year they have had some riveting price moves.

Crude oil, so far in 2006, is up only 2-3%, but in the previous 2 years, prices more than doubled. Price increased more than 6x since 1999 to its highs. Silver, after a big drop from highs last year, is up almost 60% so far in 2006. Gold has rallied much less, only up about 25% and still below last year's highs. But overall, commodities collectively have certainly seen a better price performance than almost any stock portfolio in 2006.

Is it any wonder that funds are pouring money into commodities? While the grain industry is crediting the ethanol/biofuels boom for the price gains, since other commodities like energy and metals are higher, is there other factors leading to the price rise? Besides, ethanol is booming due to higher energy prices the last 2 years, and something else drove energy prices higher other than a hurricane here or there, right?

One factor I've read frequently in financial circles is the flight away from the US currency, and the weakness, which the US has exhibited militarily, economically, and philosophically in the past few years. Where just a few years ago the mighty US seemed majestically powerful (remember the Kuwait/Iraq war with our display of high-tech firepower?), today it seems that a few disorganized bands of fighters can tie up our mighty military with all its technological marvels. Because of our aggressive overseas tactics, the US has lost a great deal of respect from other European countries, and our currency is lagging badly in world markets.

While we used to think rising commodities was a sign of a strong economy (and inflation), instead I've recently read a lot of material suggesting the brunt of the price rise is due to a weakening US currency and economy. Since the US isn't so mighty anymore, our currency drops in value- making commodities desired world-wide more valuable as measured in US currency. A good example is a recent period in which oil values measured in US dollars rose over 70%, while in Eurodollars it was up only 17% in the same period. Most other currencies in the world have also gained on the dollar in the past year as well. So, with a declining dollar, US commodity values rise, but US stock market values decline along with our economy.

A former administration official argued a few years ago that one of the pillars of a strong US economy was a strong dollar. The past few years, the dollar has been anything but strong! Is that suggesting some other changes on the horizon? Perhaps the current rise in commodities is not just a flash in the pan, but is a reflection of a more pronounced fundamental shift in the US economy?

While the push and shove of grain fundamentals and biofuels/ethanol is having a pronounced impact on grains for now, perhaps there is other underlying economic factors at play here as well? If so, we could have an interesting period the next few years, with a pin-ball game of rising commodity prices bouncing back and forth between different commodities at different times, ringing the bell of higher individual commodity prices at various times (in grains perhaps determined by acreage planting decisions?).

Marketing may not be simple in such a system, but decisions still have to be made.

The big question on everyone's minds today is the big price move higher during harvest, and whether that price inflation will last?

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