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Will bull markets continue at current lofty levels?

I hate using the phrase “New Era” because it implies commodity prices are going to a much higher level and staying there. That may or may not be the case. There's little question soybean and corn prices are in the midst of major bull markets as I write this, and, of course, the questions are how high is high and will the prices stay at these lofty levels.

Shift in market structure

The structure and the fundamental influences on grain commodities are going through dramatic changes that are here to stay for a long time. They include:

  1. The biofuel industry is supplying a huge increase in demand.

  2. The money flowing into commodity and index funds has increased significantly, which further increases buying power in futures markets.

  3. As grain markets shift from “open outcry” trading on the Chicago Board of Trade into electronic trading, volume of trading and volatility will also increase.

These are not minor ripples in the tide. Never in history have we gone through such a transition. Yes, there have been changes and improvements in technology, but never such a key fundamental change.

One issue all grain farmers should keep in mind is that there will likely be a political battle on subsidies for the ethanol industry. Will this support continue? There's little doubt in my mind that the supports will continue.

But put yourself in the position of a pork producer, poultry conglomerate, large dairy farm or a food processor. Their argument, and they have a strong one, is that the government shouldn't be supporting the ethanol industry and driving up corn and soybean prices at their expense.

When it comes to shifts in grain prices, there's always a winner and a loser. And the buyers are definitely on the losing end of this battle. Will they get financial aid from the government? We will have to wait and see.

Price volatility

The markets have moved so dramatically since the first of October, it's difficult for anyone to stay fastened in his seatbelt. Buyers always want to buy at last week's lows and sellers are not sure what to do. It is important in this market to keep a perspective and to recognize that as sellers most producers are always marketing at least two year's crops.

Know in advance what will make you happy or unhappy in this kind of a market.

For example, if you are 50 percent sold on the crop just harvested and have nothing sold on the crop that will be planted this coming spring, I view that as roughly 25 percent priced on two years of production. Some people will view that as too much and some would view that as too little.

Some producers want to be long two years crop at the same time.

Remember that if you concentrate on buying back old-crop grain that has been sold, you will lose concentration on marketing the new-crop — where your interest should be the strongest. It is very difficult to emotionally handle marketing two years of crops at the same time, which is why scale up selling works well in this type of market.

How high?

Corn and soybean markets are both trying to “buy” acres at this point in time. Most key planting decisions will be made before the end of December. There are gap objectives in March corn that forecast the possibility of $4.50 futures. Soybeans have no obvious technical objective that I can see.

I do not know nor does anyone else know exactly where this market might peak from a price perspective. This is a market, however, to look at more from a time perspective. The top will likely be put in both corn and soybeans from panic buying by end-users and speculators. That means that the panic top will likely be put in late in December or early this winter.

Once the market has the acres bought, there will be little reason for prices to continue going higher until the market becomes concerned with the 2007 yields.

When everyone in the coffee shop is convinced that prices are going to go up forever and there's no reason to sell — quietly leave and sell everything. This market is poised to make an early peak before planting begins.

Even if you're not convinced that I am right on this theory, remember this old adage, “When prices are profitable and you are not certain where prices are headed, sell something and hope you are wrong on that sale.”

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