Published: August 01, 2008 11:12 am            

Grain Angles: 20/20 hindsight will serve us well

Originally published in the July 25, 2008, print edition.

It has been a rough ride since the June 30 U.S. Department of Agriculture report. The factors influencing the market have changed and have not taken long to shift direction.

The largest influence has been the barrel of oil. Recently that market has softened and oil values are adjusting. It has been well documented that the long-only index funds have been driving the market and they continue to have a huge influence today.

December corn has moved dramatically off its top near $7.90 to $6.28 on July 20. Hindsight is clear and it will serve us well as we see that $8 December corn futures was the line the market was not willing to cross. It is safe to say the players in the market could not afford to have it go any higher; it would have caused total chaos in the marketplace.

The USDA projected 87.3 million acres of corn planted, and a private firm projected a yield above 150 bushels per acre this fall, which seemed to start things lower. Just like when the market was going up there was no way to know how high it would go; there is no way to know for sure how low it could go. Most of the time when the market corrects it usually over-corrects, just like it probably went higher than it should have. There is a strong likelihood corn and oil will continue to track together just like in the 1970s.

Soybeans are not immune to the market correction. August soybean futures are down to $15.41 while November soybeans are at $14.48. Soybeans have come under heavy pressure many days this month and the real soybean growing season is yet to come in August.

The soybean supply is tight which leaves the market with some support. The U.S. is not the supplier of soybeans to the world so it is difficult to think we are in the driver’s seat in the marketplace. The favorable growing conditions will improve the chances of double-crop soybeans yielding well and adding to the supply of domestic soybeans. This market has also tracked along similar to the 1970s.

It is difficult to know what will happen the rest of the summer. The Aug. 12 USDA reports will be the first report of the season with actual surveys being taken by people on the ground. Growing conditions have improved and it looks like the crop is catching up. Rainfall in July is a big benefit and most areas have gotten some.

The run in the market began about Sept. 15, 2006. Two years ago this summer everyone was talking about how big the loan deficiency payment would be in the fall. Then circumstances changed and the market began an unbelievable run.

Even in a down market it is still good to make sales. The basis has started to improve and that is a sign the market needs grain. Remember that the market levels, and sales made, are still historically high. The soybean market really has no carry so it makes sense to move soybeans from November to January. The corn market has a huge carry from December to July 2009. There is a 39-cent carry to next July plus any improvement in basis. There is a 19-cent carry to March 2009.

The grain business has changed from this point forward. Livestock producers have begun to acquire control of land to produce their feed. They will not get caught in this scenario again. Grain producers are caught with normal marketing channels not being available, which will force more and more grain producers to learn how to hedge grain efficiently because the Chicago Board of Trade did not stop trading grain.

The volatility is not over but this is a time to regroup and reflect on what has happened. It is important to learn and make changes for the future.

        

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