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Ag markets need balance for sellers and buyers

USDA's June crop report showed very few surprises. Nevertheless, many observers in the grain industry find the numbers to be quite bullish for the corn and soybean market.

Carryover supplies for the 2009-10 corn crop are now forecast by the USDA to be 1.09 billion bushels versus this year's estimate of 1.6 billion.

Carryover supplies in soybeans are very tight this year at 110 million and the forecast to be only 210 million next year.

While these numbers may appear to many to be bullish on the surface, I think all producers should be very cautious.

As I write this column, the dairy, beef and pork industries are experiencing the worst financial times of the century.

Low milk prices, pork and beef prices combined with high corn and protein prices have red ink being spilled everywhere.

The profits for a farrow-to-finish hog operation in the accompanying chart prepared by Iowa State tells the story.

Sellers need buyers

In agriculture, as in almost any market, it is important to have balance where both sellers and buyers have an opportunity to make a profit. The problem we are facing right now is that even though growers of corn and soybeans are jubilant over high prices, these prices cannot last without the risk of putting the buyers out of business.

Whenever markets go to extremes, there are typically very big winners and very big losers. That results in market prices going to the other extreme — and we need to remember that.

As I write this column, December corn futures are trading at $4.65 per bushel and November '09 soybean futures are trading at $10.80 per bushel. As bullish as grain prices might be, I am confident that by the time harvest rolls around we will find that there is no shortage and, in fact, a large surplus of both corn and soybeans at that price level.

In other words, almost irrelevant of the weather this summer, if the livestock industry is going to be forced out of business, then grain prices are coming down — and possibly sharply. Big bull markets are always followed by big bear markets.

Unfortunately, some producers in the livestock industry will be forced into early retirement as a result of high grain prices this spring and early summer. For those who survive, beef, pork and milk prices will likely be significantly higher a year from now and producers will return to profitability.

In the meantime, the prices will be less profitable for the growers of these commodities. Take advantage of the high market prices when they are available.

TAGS: Outlook
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