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Corn+Soybean Digest

The Backside of a Bull Market

Last April I joined nearly 200 people with a stake in commodity futures to discuss a number of hot issues affecting the markets. Of particular interest was the influence of “long only” commodity index funds and their impact on a raging bull market, cash/futures price convergence in grain markets and the credit crunch.

In my opinion, the CFTC showed some compelling evidence that indicated the index funds were not driving the markets. Despite this evidence, I took from the day a strong sense from most participants that the world of commodities would be a better place if the index funds would go away.

In the last six months, the market accepted the decline from $7.50 to $6.50 December 2009 corn, and from $16 to $14 November 2009 soybean futures with ease. The market was overdue for a correction. We were equally philosophical about the decline to $5.50 corn and $12 soybean futures: Shaking the weak longs out of the market sets the stage for a sustainable rally.

Our concern started to show when the growing financial crisis spread and prices dropped again, below $4.50 in corn and $10 in soybeans — prices not seen since the harvest of last year. Hey, big bad index funds, did you have to go away so fast?

THE BACKSIDE OF a bull market is rarely pretty. This is a “sit up and pay attention” type of market and I offer these thoughts on pricing grain in the current market.

First, concerning last year's crop, it helped to adhere to the 11th Commandment of grain marketing: “Thou shall not hold unpriced grain in the bin after July 1.”

Those of us with short memories recall that last year it didn't play out this way — cash prices did nothing but rise into harvest and beyond in 2007. This is why marketing is never easy, as the exceptional case proves that no rule is 100% correct. With that said, I'll remind you of the need to forget last year when searching for the best pricing approach today (see my January 2008 column).

Second, I am glad I have a plan for preharvest marketing in 2009. I made a few early sales, far from the top of the market but much better than today's prices. Volatility in the markets makes for a difficult forward pricing environment. Forward contracts for the 2009 crop are somewhat difficult to find, and they often involve a steep discount in the basis. The availability of hedge-to-arrive contracts is sporadic.

More and more producers are opening their own margin account to use futures and options directly to hedge price risks.

The pull-back in grain prices since early summer has been stunning. Is the bull market over, or is there hope for better prices in the months ahead? I am encouraged by several points:

  • While profitability in the ethanol industry suffers, many new plants are in the final stages of construction. USDA forecasts ethanol demand for corn will grow by 1.1 billion bushels in the current crop year.

  • USDA projects no modest growth in the ending stocks of soybeans, despite the fact that we planted 9 million more acres this year.

  • Finally, on a broader note, I am encouraged by the reason those index funds showed such great interest in commodities. Studies show, over the long run, commodity prices do not correlate well with the performance of stocks and bonds.

The last few months have been a difficult period. I hope grain prices “uncorrelate” soon.

Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at [email protected].

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