Published: July 23, 2008 04:42 pm            

Grain Angles: How many acres will be harvested?

Originally published in the July 11, 2008, print edition.

We’re in the midst of an historical run as commodity prices continue to push on this summer. At this point if you are a bull or a bear there are convincing scenarios either way.

The corn and soybean markets have added to their gains in the last two weeks with corn up 20 to 25 cents and soybeans up well over a dollar. Everything is coming up very bullish at this point, which is typical when the markets are as high as they are. The market will come down twice as fast as it went up when the tide changes.

The U.S. Department of Agriculture surprised everyone on June 30 with the acreage report. The report showed 87.3 million acres of corn planted and 74.5 million acres of soybeans planted. The big question that needs to be answered is: how many acres will be harvested?

It has not been a kind spring, with it being wet, cool and late then to move into massive flooding from Iowa on south. Many acres were flooded out and a total loss. It will be those acres that had excessive moisture but were not destroyed completely.

The projected harvested acres of corn (78.9 million) and soybeans (72.1 million) coupled with low yields will lead to a bullish scenario with the supply extremely tight for both crops. This is part of the process of moving from a demand-driven market to a supply-driven market.

If the market continues to go higher, price rationing will have to begin. The high prices are going to force changes in feed rations whether it is cattle, dairy, hogs or poultry. The livestock industry is already in serious pain and rationing is underway to just try and survive.

The ethanol industry is also feeling the effects of the high prices. Recent announcements of plants not opening, and some not producing at full production, are signs of things to come. A very bullish supply scenario could develop that could push the price of corn into the $9 to $10 range. This will create a very tough situation for those who are selling grain as buyers retreat from the market like they did earlier this year.

Marketing tools are limited in this environment. Some companies will offer hedge-to-arrive contracts for a fee and restrictions. All are offering cash contracts but not very far into the future. Advice encouraging producers to set up hedge accounts — and be ready to hedge grain when the market turns — is a pretty common theme right now.

The requirements to open an account have changed with the volatility but they can be opened up. There is something about having to make a margin call that is very unnerving to most producers. The same price fluctuation is happening to the grain in the bin or field but a check is not being written at that time.

This is a tool to discuss with your lender and a broker to make sure you are comfortable with hedging grain. You have the risk of making a margin call instead of the elevator and basis is at risk also.

        

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