Published: May 02, 2008 10:41 am            

Grain Angles: Watch for farm bill’s market impact

Originally published in the May 2, 2008, print edition.

The landscape of the grain business continues to change with more uncertainty than the week before.

It has been a long time since the weather has been this uncooperative in the Upper Midwest. Planting progress is falling behind, but it is difficult to say if the market will react or not. It seems in the past the market would have been more jumpy than it is, but we are at such high levels and the influences in the market are different that it is anyone’s guess right now. I recently had a message on my phone one day, “How can the corn market be going down with the planting delays we are facing?”

I do not want to jinx anything but I have been concerned about what the government might do in the face of skyrocketing food prices. The new farm bill seems to have been hammered out with enough changes to go around for everyone. It appears that nutrition is on the minds of everyone and nutrition programs are going to get a boost in funding. The blender’s tax credit appears to be taking a cut of 6 cents per gallon.

Research money is being advanced into other biofuels to advance the development of fuels based on something other than corn. Texas Gov. Rick Perry is asking for a 50 percent cut in the ethanol mandate citing the price of grain and its effects on the livestock industry. I had heard the idea of cutting the tariff on South American sugar-based ethanol would be enacted, but I am not sure if that got any traction.

The impact of any policy changes is yet to be seen. The corn market in the $5- to $6 range has a chance to plummet quicker than $3 corn. The same holds true with soybean prices in the $13 to $15 range. We do not know what type of weather rally is ahead, if any. It is well known that any abrupt changes in prices will be painful because the cost of production has risen dramatically.

The margin risk for grain buyers has gotten so great that selling grain is no longer as easy as it was. It appears the price of grain is tied to the price of energy. This relationship of energy and grain is similar to the 1970s.

The soybean basis has been coming in, so most of the soybeans must be moving through the system. The corn basis is steady to wider in the last two weeks. There is plenty of corn available and it is moving to market. If this corn crop is not going to hit at least trend-line yields, the market could be volatile and the basis will continue to deteriorate.

Some grain buyers are offering basis-only contracts — about the only tool being offered — and it might be a tool to use. If we have a short crop the basis levels we have are wide, but they may look narrow by fall depending corn production and demand. Soybeans could be under pressure if corn acres get switched to soybeans at the last minute.

There are a number of things at play and it is not easy. It is important to control what you can.

        

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