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The Bear Makes a Comeback

October 2, 2008
By: Bob Utterback, Farm Journal Columnist

We have already lived through a history-making event in 2008 with $8 corn, $16-plus beans and $25 wheat. What's next? In 2008, we destroyed the bear (also known as the forward seller). Many who stored grain unpriced did well if they sold at lofty levels, but I've heard there are still producers who are storing grain. In 2009, the marketer will rise to the top, and it won't be quite as pretty a picture for the cash seller off the combine.

The reasons behind the recent excitement include the following:

-World stocks worked down to historic low levels.

-China and India started to realize their true purchasing potential.

-Wall Street has turned its attention from equities to commodities.

-The sharp rise in oil values from $85 to $150 boosted interest in biofuels, increasing corn demand. 

-The fall of the U.S. dollar from the high 121s in 2001 to its extreme lows this summer at 70.

Overall, grains and oilseeds had a strong wind at their back, allowing minor changes in supply (or a modest increase in demand) to have an overexaggerated price impact.

Now, all of that has changed! The U.S. dollar is on a roll to the upside, the world economy is correcting, effects of the subprime mortgage mess are growing daily, the oil market is in full correction mode and policymakers are working hard to increase supplies long-term. Many of the long funds have taken heavy losses and the excitement of being in commodities has soured a lot of financial players. Overall, the outside markets have turned direction from a strong tailwind to an aggressive headwind.

Each commodity needs to have more aggressive supply corrections or an increase in demand to cause significant upside price advances. Implication: There could be a lot of smoke (trading volatility) but not much progress (flat price rally).

I worry producers will try to market remaining unpriced inventory in the hope of a continuation of last year's fundamentals, instead of the reality (a change in the fundamental trend). While cash-flow requirements will be strong next year because of higher input costs, producers will want to be strong holders of 2008 product clear into next summer.

Don't focus all of your attention on unpriced inventory in the bin and pay little to 2009 sales. If a weather event doesn't occur, the potential exists for significant downside price and basis risk exposure when producers already have significant investment costs in the 2008 and 2009 crop.

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FEATURED IN: Farm Journal - October 2008

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