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Corn+Soybean Digest

The Case for $3 Corn, $7 Beans

The future for U.S. crop producers remains very bright for decades to come, but a unique combination of ill-timed acreage expansions amid a sudden drop in global demand threatens to make 2009 a harrowing period for U.S. farmers. In our opinion, both corn and soybeans appear especially vulnerable to severe price declines if demand softens as we anticipate and farmers plant as many acres as slated.

When studying corn consumption statistics, it's hard to believe we're looking at the same crop that accelerated from around $4.70/bu. to nearly $6 in the first three months of 2008. A year ago, U.S. corn was the cheapest feed grain on the planet, which led to record exports while U.S. feeders maintained strong usage rates at home. Ethanol demand was also climbing, as gas pump prices went through the roof.

This year, corn exports are half of what they were 12 months ago, the appetite for ethanol has cooled dramatically and U.S. feeders have slashed herd sizes to their lowest levels since the middle of the last century.

U.S. soybean exports have held up nicely so far in 2009, but China has been the predominant buyer to such an extent that one has to worry about soybean demand if China was to disappear from the picture. And the U.S. crush rate, which is already dramatically behind last year's pace, looks set to continue falling as poultry and hog numbers decline.

What concerns us most, though, is the worrying number of producers who seem to expect similar price performances in 2009. We've heard all the arguments: Farmers can't make money planting $3.50 corn, and so will cut back on corn acres; the Chinese will continue to buy indefinitely, which will keep U.S. soybean exports propped up. But frankly, we don't believe that either of those scenarios holds water.

For starters, since when has $3-3.50 corn been “too cheap to plant?” That price seemed to be good enough for farmers here for 100 years or more, until quite recently. And now suddenly the economics don't make sense? We appreciate that fertilizer prices at $1,000/ton made sub-$4 corn a painful prospect, but fertilizer is now nearer $500/ton and sliding, so that argument needs to be updated to reflect today's input cost realities.

AND AS FOR China's staying power on the export market, clearly that country has massive potential to consume all manner of raw materials. But year after year they turn to South America for their soybean needs as the calendar year progresses, so we expect them to do the same in 2009. This would lead to a petering out in U.S. exports from April onward, which will weigh on prices.

Obviously, weather issues that prevent plantings could still change the story, but as I write this in mid-February, we're worried that poor demand numbers will lead to much lower corn and soybean prices as 2009 unfolds. Further, farmers have a tendency to focus more on total revenues than on crop prices, and so, in our opinion, will seek to maximize output of their preferred crop once they've determined their production makeup. This could lead to higher corn and soybean plantings than needed this year, and certainly more than many anticipate at this juncture.

We hope we're wrong in our projections and see $5 corn and $11 soybeans this year. But right now we think $3 corn and $7 beans are more likely as these markets adjust to this short-term dip in demand. Our long-term outlook for all the major crops remains very bullish, as the growing global population competes for food. But this year things will be different, so please adjust your expectations accordingly and make plans to help you weather the storm and thrive again when demand picks up a year or so from now.

Gavin Maguire is director of EHedger LLC, Chicago, IL, and oversees the firm's analysis of and commentaries on the commodities futures markets.

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