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Commodity markets in for wild ride

The year 2008 is shaping up to be “one heck of a ride” in the commodity markets, says Lewis Campbell, market specialist with Palmetto Grain Brokerage in South Carolina.

“We’re looking at record prices for corn, soybeans and wheat, which are also contending with record-high prices for fertilizer, diesel and the other inputs associated with farming,” said Campbell, speaking at the recent Georgia Corn Short Course held in Tifton.

Being able to market and manage not only input costs but also the price for which you sell your crops will be paramount in the upcoming year, he says.

“Corn, soybeans and wheat were in charge last year, and farmers in Georgia responded by doubling acreage in one year,” says Campbell. “Corn has been moving out of bins and it’s slowly moving into the market. Now it’s time to look at re-tooling and building infrastructure for the coming year.”

But the fertilizer companies appear to be holding all the cards this year, he adds. “Whenever we talk to our customers, we talk about input costs and how to contend with those. At this point in time, fertilizer prices may be controlling more of what we do on the farm than we’d like,” he says.

With corn at $5 per bushel, companies don’t want to have two to four weeks of supply on hand, he says. Looking at price probabilities over the past 20 years, there’s a 5.4 percent chance of December corn being over $3 per bushel, a 9 percent chance of soybeans being over $7, a 5 percent chance of wheat being over $4, and a 25 percent chance of December cotton being more than 70 cents per pound.

“We are in unprecedented times when you look at current prices. Corn is $5.03 going out to 2009 and $5.01 going out to 2010. A lot of growers are looking at trying to price some December 2009 and 2010 corn because it is at profitable levels. The problem is that you’re running into problems with some elevators or buyers.

“We’ve seen corn go from $3.25 to more than $5 since harvest. If you’re an end user who is using 200,000 to 300,000 bushels of corn per week, and you have to pay and manage your cash flow to buy bushels, you’re not interested in buying something that you’ll have to carry a position on for two years, especially when you don’t know how the acreage situation will shake out. A lot of pressure is being put back on you as a producer to do it yourself, whether you’re using options or futures. It can be done — you just have to work with your banker or someone who’ll help you do it,” says Campbell.

When growers look at current prices — even with high fertilizer prices — $5.40 for corn out of the field still does well, he says.

Corn prices have rallied since the latest USDA report because the 2007-08 yield was lowered by almost two bushels per acre in the Midwest, taking away 400 million bushels of corn.

“The ending stocks number was at 1.8 billion bushels and now it’s at 1.4 billion. This past year, we planted almost 15 million more acres of corn and made 150 bushels per acre nationwide. You’d think we would have built stocks up to a comfortable level. But we added only about 100 million bushels to our bottom line. That’s where ethanol usage comes in, and our exports have been extremely good,” says Campbell.

Everyone in the USDA is comfortable with the idea the United States will lose three to four million acres of corn to soybeans this year, he says. “If that happens and we make yields of 155 bushels per acre, our ending stocks go from 1.4 billion down to 765 million. That’s why we’re seeing these high prices. After they took those 400 million bushels from us, corn now is in a situation where three million may be the maximum number of acres we can give up, and that’s assuming we make 155 bushels per acre.”

The growing season in the Midwest this past year was “pretty good,” says Campbell. Early in the year, there were high plant populations, good growing weather, and people were suggesting that the United States could match an all-time high of 160 bushels per acre from a couple of years ago, he says.

“When we got down to it, we could do only 151 bushels per acre with a pretty good growing season. One-hundred and fifty-five bushels per acre is attainable. But we’re concerned where we’ve got corn following corn. More interesting is as we go into 2009 and 2010, they are projecting that corn will need to buy back seven million acres from soybeans, cotton, peanuts or pasture to maintain current stock levels.”

Current prices are only a few cents off the record-high prices of 1996. The difference between 1996 and today is that 1996 was a supply problem, lasting one year.

“This is a demand problem, where we give up acres one year but then have to have them back the next year. We can’t fix this problem in one year. I don’t know how the market is going to adjust itself to fix it in several years. None of this takes into consideration any potential crop problems in the Midwest. We just think things have been wild in the markets in recent months. But if we have any type of weather problem this season, it will get interesting.”

The market will be tight, says Campbell, and it will stay supported until the crop is planted and the season progresses through the summer.

The world, he says, hasn’t been able to make a wheat crop in the past two to three years, and the corn harvest hasn’t been great. “Our stock levels in the world are dropping, and our ending stocks in the United States are dropping. We’re the No. 1 producer of corn, so they’re coming to our doorstep to try and buy it from us from the export market. We keep thinking that with the high prices of $5 per bushel, we’re going to stop exporting corn.”

Campbell said in January that basis in Georgia was soft, but that it would pick up as bushels moved out of the crop.

Corn and soybeans, he says, are “joined at the hip” now. “When you look at crop budgets, soybeans are fighting for and they need their acres. The big impact in the Midwest is how high bean prices need to go to steal acres from corn. Corn is not backing down and letting soybeans take these acres. Watch soybean prices because they’ll have more to do with corn prices than corn itself.”

This past year, the soybean carryover went from 570 million bushels down to 200 million bushels, says Campbell. “We’re saying that we have to get back four or five million acres of soybeans just to maintain. This 197-million bushel carryover is why we’re looking at bean prices at $12 and $13 today and for the next two years.”

Farmers must have a grasp on cost of production and lock in some of the profits that are available this year, he says.

Campbell says electronic trading has been introduced into the agricultural markets, meaning that pit trading no longer is the No. 1 tool, and 60 to 75 percent of the business is now done electronically.

“This means anyone who has an account can enter an order and get into our markets, and that’s why we see some of these wide swings.”


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