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$12 corn: Crazy, but possible

CHICAGO, Illinois ( this year’s Commodity Classic conference, at least one market-watcher suggested that a hiccup in the spring/summer crop-weather, causing reduced yields, would cut further an already 15-year low U.S. corn stocks supply, sending corn futures prices marching towards $12 per bushel.

Meanwhile, some CME Group floor traders have figured that, adjusted for inflation, it’s not unrealistic to believe corn should be closer to the $10.00-$12.00 range vs. $6.00-$7.00 per bushel.

As of this week, the July corn futures contract, the one that would see a $12 price first, traded within a $7.70-$7.72 range. So, is it really possible for the corn market to reach $12.00 per bushel?

Currently, a much slower-than-average planting season is raising eyebrows among traders and analysts. Plus, wet and cool weather conditions forecast for the Midwest through April are perhaps building further arguments for a significant corn market rally.

David Hightower, The Hightower Report co-owner, says corn and soybeans both have support to run sharply higher.

“We have to put this $12 corn price into context. As they relate to alternative fuels, with energy prices running higher, this pushes up corn and soybean prices.”

Energy prices are at four and sometimes five times their historic values, and sugar and platinum at eight times their historic values, Hightower notes. "So, $12 corn and upper-teens for soybeans are not irrational prices," Hightower says.

Hightower adds, "The fact is, these ag-markets are so closely tied together than ever before. For instance, if we have a drag in wheat prices, the already tight corn stocks situation will drag wheat prices up with a corn rally."

One CME Group grain floor trader, requesting anonymity, says $12 corn would only follow a weather scenario where you could prove damage.

“I think the March Planting Intentions Report, estimating 92.0 million corn acres, almost had enough to let us feel comfortable with trend yields, relieving worry of a shortage of corn,” the floor trader says.

Plus, Russia will have feed grains to harvest after July 1, propping up the world’s feed supply, he says. “We can still feed some SRW wheat that wet weather is making into more of a feed quality vs. food crop.

Still, rain is needed in HRW regions to keep wheat prices sideways, the Chicago trader says.

Gross dollars vs. $12 market

Don Roose, U.S. Commodities broker in West Des Moines, Iowa, says $12 corn is possible, but encourages farmers to watch their net and gross dollars per acre figure, not just market price.

“We don’t know what the ‘new normal’ corn price level is yet, because we are in a zero interest rate environment. “The cost of carrying goods can slow down a lot of commodity prices. We’ve had these high grain prices for six months. But, that could change dramatically, if interest rates jump,” Roose says.

As far as $12 corn, or a conversation of a price near there, it’s possible short-term, Roose says.

"But, farmers shouldn't get caught up in the $12 rhetoric and not take some profits now. History shows us that the market balances itself out," Roose says.

With 2011 average net profits per acre running between $300-$500 per acre vs. $50-$100 historically, farmers are seeing returns very seldom experienced on grain farming.

Corn rationing

If corn prices reach the $10.00 mark, sugar-based ethanol becomes competitive with corn-based ethanol into the export market, the CME Group grain floor trader says. “The world May sugar futures prices, below 19 cents, starts to become competitive with corn-based ethanol,” the floor trader says. On Tuesday, that sugar futures price traded at 24 cents.

At the same time, a University of Illinois study shows that ethanol plants use a pretty high corn price as a measure to begin rationing. In fact, at today’s gasoline price, the corn price is allowed to be close to that $12.00 per bushel mark.

The study shows that when wholesale gasoline prices are $3.00/gallon, the shutdown price of corn for ethanol plants is $9.78/bushel. When gasoline is $2.50/gallon, the shutdown price is $7.84/bushel. Gasoline at $3.50 raises the shutdown price to $11.72.

$18 Soybeans?

“As I walk through some of the supply/demand numbers and I find out we have lower soybean acres, we could eventually run out of soybean ending stocks,” Hightower says. So, maybe even $18-$19 soybean prices are not irrational.”

However, with poor crush margins, remember the Chinese have too many stocks of soybeans, the CME Group soybean floor trader says. “Soybeans need to break 80 cents to be competitive with China’s government stocks.”

With April U.S. corn plantings delayed, there is a scenario that could add 500,000 acres of soybeans, raising new-crop stocks to 200 million bushels. “If you combine that amount of stocks to a soybean/corn price ratio at 1.5, the market could trade soybean prices at $12.00 and corn at $8.00 per bushel,” the floor trader says.

Marketing advice

Though farmers have historic profits at these price levels, historic costs should be a reminder that going into this new crop-season expecting 'the moon' is not the appropriate attitude, Hightower says. "You have to drag along a 'put' option marketing tool. Hedging is fine, just don't let your hedge get in the way of an historic price spike. And while the premiums seem like a lot, if you haven't already sold your production, do something (buy a 'put') that gives you a floor that doesn't commit you selling at a bigger price with a drop in the market," Hightower says.

Perspective needed

Meanwhile, if you are looking for a dose of reality. On Wednesday, this reporter received an email with historic corn and soybean charts attached. The email subject line read; "2008 Repeats-Template to the future". Essentially, the corn chart was a reminder that in June of 2008 corn futures traded at a record price of $8.00 per bushel but fell back to the $3.00 mark in December of that same year. Likewise, the June 2008 soybean market hit blasted to $16.50 per bushel, only to sink in October to $8.50.

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