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Grain markets affected by many factors

Aug. 2, 2012 | 0 comments

There are a lot of moving parts in the current corn market - this year's production, which seems to be shrinking as the hot and dry conditions continue - along with shrinking demand in the face of the high prices.

Other factors are market speculators, export demand, demand from ethanol plants and from livestock feeders who are reducing their animal numbers as prices rise.

Even the European economic situation may be a factor.

"It's really easy to get caught up in the emotion of the marketplace," said Mike North, a risk management advisory with First Capitol Ag, at a meeting of about 250 farmers in Waunakee. "Don't make decisions based on emotion."

He farms, too, and said it's not very much fun walking through cornfields with no ears.

Though not willing to make price predictions in this volatile market, North said there are a lot of things to consider and outlined those factors influencing the market.

He also talked about 1988, the year that is being compared to this one.

In 1988, previously the worst drought year for the Midwest and Corn Belt, there was a big price run as conditions worsened, he noted. In late June of that year, the price of corn was $2.20 a bushel.

As conditions stayed hot and dry, the price shot up to $3.70, but dropped back down to $2.65 in a few weeks.

"There's a lot of talk right now and guesses about where this market's going to go."

He advised farmers to make sure they don't get so emotionally caught up that they make poor decisions.

While farmers are understandably concentrating on the fact that they don't have much corn growing in their fields, the demand side of the market is thinking about the price of corn and their need for it.

"The other side of the story is there are people that have to buy feed, or feedstocks in the case of ethanol plants, and exporters, that have stopped buying corn.

"We've already seen a massive increase in breeding stock being sold off for slaughter and an increase in low-weight steers. Many ethanol plants have closed or reduced their capacity to 70 or 80 percent," he said.


North said that with the liquidation of many beef herds and even dairy herds there is long-term demand destruction going on that can't be instantly reconstituted for the next year.

In addition, the higher price of corn has caused exports to drop as the country braces for a corn crop that is 30 million bushels (or more) short of expectations.

It takes 15 bushels of production per acre nationwide to create a billion bushels of corn, so the production prediction averages that come out of the U.S. Department of Agriculture and other sources are extremely important to getting a picture of what's going on.

Currently the USDA has pegged corn production this year at 146 bushels per acre, while trade experts predict it will be a bit lower at 135 bushels per acre, he said.

Whatever farmers are eventually able to harvest will determine what's available to be used for feeding livestock, ethanol plants and filling export contracts.

The demand picture has changed in recent years.

In 2008, the ethanol industry demanded about 3.5 billion bushels; today that demand is five billion bushels of corn, North said.

"They've got a lot of room to give up and that likely will have an impact. There's a demand that has stepped away from the market."

Another component to the price picture is speculative money that has entered the marketplace, North said.

"Real demand has stepped away from the table and speculation is driving the market."

There are more than one million contracts on corn, he said, and the market is "very nervously adding positions" as corn approaches $8.

But, again, there are lots of moving parts.

As the market watches what could be a European economic meltdown, led by Spain's problems, large investment funds could be affected.

"Spain might end up being the big domino in Europe."

The corn market could also be affected by activities in Washington, DC.

"There's drought frenzy in Washington as they consider how this is going to affect food prices and it's an election year.

"That could cause legislation to be introduced and rushed through." (See sidebar.)


Farmers should take some time to think about what they will do to cope with current conditions.

"Have discussions with your banker, your advisors, your wife. You don't want to make bad decisions on top of other bad decisions."

The markets, said North, have a tendency to correct.

"They can go higher than we think they can and go lower than we think they should."

Every market presents an opportunity, he said, and he sees the best strategy right now is options, but said that may require a lot of cash flow.

"A question to ask yourself is: can you handle the cash flow strain."

Spring prices for corn stood around $5.68 a bushel and farmers are now looking at $8 corn.

"Buying a put option creates a price floor; a put for $7 corn runs you about 30 cents per bushel," he said.

Asked about imports of corn, North said that South America and South Africa don't have the capacity to produce enough corn to meet the U.S. demand.

The United States produces about 55-60 percent of the world's corn and about 65 percent of the world's soybeans, he estimated.

Still, the prices being seen today are encouraging the development of additional land, most notably in South America, where "bulldozers are having a great year," he said.

"High prices excite crop production and, once that base is created, it isn't going to go away."

The meeting at which North spoke was sponsored by the Wisconsin Soybean Growers Association and Wisconsin Corn Growers Association and their related promotion boards. It was designed to help farmers deal with questions related to the drought.

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