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Bullish News Continues Flowing

Friday, February 1, 2008
filed under: Marketing/Risk Management

The bullish news continues to flow in to the commodity markets, with the latest blast of bullish inputs coming from the January series of USDA reports.

These reports showed bigger corn consumption than expected, plus reduced corn ending supplies by 359 million bushels. The USDA winter wheat plantings estimate also showed that hard red winter wheat acres were much lower than expected. It was too dry across the major hard red winter wheat producing states last fall, and producers simply decided not to plant into very poor moisture conditions.

The impact of these reports was that corn, soybean and wheat futures traded up their respective daily limits for two trading sessions. Soybean, soybean oil and wheat futures have now set new all-time highs. Corn futures have not eclipsed the all-time high of $5.50 set in 1996. Not only are prices for the major crops at or near all-time highs, but prices for nearly every other crop also continue to rise.

The unexpectedly sharp decline in this marketing year’s corn ending supplies has changed the makeup of the 2008 acreage contest in a major way. Prior to the January USDA report, corn ending supplies were pegged at almost 1.8 billion bushels — a comfortable number that sent a message that corn could afford to give up acres to soybeans in 2008. But this new report cut those ending supplies to just over 1.4 billion bushels.

It is probable this number eventually will get smaller, because I think corn demand is still understated. The 359-million-bushel cut in supplies divided by an average yield of 150 bushels an acre is the equivalent of losing 2.3 million acres of corn three months before the snow melts. Soybean needs to gain a minimum of eight to 10 million acres in 2008 to prevent ending supplies from dropping to dangerously low levels. Add in the fact that other oilseeds like sunflower, canola and flax also need more acres — as do most other crops — and you can see why the market has gotten nervous: there simply aren’t enough acres to go around. That has sparked another round of buying, especially in the new-crop months.

It wasn’t just the USDA reports that gave markets a lift to new highs.

• There still is little evidence that high prices have rationed demand. Export sales continue to be very strong, and the domestic processing/crushing industry is still enjoying strong margins.

• The Brazilian and Argentine soybean crops are in generally good condition; but it has been on the warm and dry side in Argentina recently. Weather in these two countries will still play a role in markets.

• There also is the continued flow of fund money into all of the commodities to start 2008. Some analysts are forecasting that as much as an additional $30 billion to $40 billion might come to the commodities markets in 2008.

• The passage of a new energy bill has also added more bullish sentiment to the corn and vegetable oil markets. We now have a biodiesel mandate for the first time — and it is a big one. It could eventually require as much as one-third of total U.S. vegetable oil production, assuming no veg oil imports. The new energy bill also raises the corn-based ethanol mandate.

The question on everyone’s mind these days is: How high can prices go, and how long will this last? No one can answer this question today. The energy mandates for ethanol and biodiesel have no doubt put a higher floor under corn and oilseed markets. They will require consistently large planted acreage that will make it difficult for other crops to compete for those acres.

The specter of the USDA opening or releasing CRP acres is a potential bearish factor, but it doesn't appear that will happen in 2008. The other bearish factor is the talk of a slowdown in world economic growth. That could slow demand growth and lead to increased world supplies.

But these are big markets — and they are likely to remain big markets at least through 2008.

The month of February will be a very important period of time in the markets for producers. It is the month minimum price guarantees for the various crop insurance programs are established. Most of these price levels are based on new-crop price averages during the month of February. Obviously, it appears the revenue assurance guarantees will be very high — including oil and confection sunflower. Producers need to consider these insurance guarantees in their crop planning process. They will be too good to pass up this year.

By Mike Krueger
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