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Corn+Soybean Digest

Sailing into Unchartered Waters

Just when everyone thought all the bullish news in corn that could possibly happen was in the market, the USDA threw in a new twist on the Jan. 11 crop report.

As everyone knows, with the sharp increases in corn use from ethanol, strong export demand and sharply increased buying from index funds, the corn market has been inundated with bullish news to push prices higher.

The only thing that has not occurred in the corn market is buying from China (which historically has never happened in large quantities). But the real jolt to the corn market now has been the sharp increase in poultry and pork numbers, which increased corn-feed usage approximately 300 million bushels more than the trade expected.

The result: Supplies for this year are not actually an issue. The USDA is expecting carryover supplies at the end of August to be 1.438 billion bushels vs. last year's 1.304. But the issue then comes a year from now when the ethanol plants that are under construction bump up usage to nearly 4 billion bushels - or possibly higher - which will likely cut carryover in 2008-2009 to fewer than 1 billion bushels. Thus, the battle begins.

TRAIN WRECK

No pun intended, but this is a train wreck for the industry. The question now: What could possibly happen to get carryover supplies back in line (which means a cut in usage)? Here are some “what ifs” that might happen:

  1. Expect a pullback in poultry production for the first time in history. The cut may not be large, but profits are hurt enough in the poultry industry that cutbacks are now almost a given.

  2. Energy prices, contrary to the popular press, appeared to have made a major top. Lower crude oil, diesel fuel and gasoline prices could well lead to lower ethanol prices, which then could lead to some of the plants currently on the drawing boards being pulled off the drawing boards.

  3. Exports could drop marginally at these price levels, but I believe this to be less likely than the two previous possibilities.

EXPECT RECORD FARM PROFITS?

Prices are now in uncharted waters. This makes decision making more difficult than ever because there is no way of making any comparisons. Nothing like this has ever occurred in history. Six months ago, $5 corn seemed almost impossible. Now, $6 corn may not stop this move.

The farming profitability this coming year will most likely set another record. If this market repeats history, however, at some point the market will become extremely overextended and whatever goes up also will sharply come down. Scale-up selling still works best in major bull markets.


Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.

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