In the Driver’s Seat

January 31, 2009 08:25 AM

Last year was about as difficult as it gets, and this year is not looking any different—only lower prices. The problem now is both the supply and demand variables that influence grains and oilseeds are being subjected to significant outside factors that make historical comparisons uncertain. Those variables include the
direction of equity markets, the U.S. dollar and crude oil prices.

At the same time, we're experiencing a global economic correction of historic proportions. Last year's run-up in prices taught customers that buying hand-to-mouth can be expensive. It appears China will have record corn acreage. U.S. corn exports are way behind and may not significantly
recover until the latter part of 2009, when many end users have already rebuilt their stock levels.

Finally, U.S. livestock producers are seeing stagnant to lower market prices while input costs rise. Depending on their facilities, they may be at break-even; most, however, are losing money and holding out for a price recovery. Don't expect feed demand to increase; instead be prepared for a contraction if any further price weakness occurs in the livestock sector.
Why did corn and soybeans experience a rally from the early December lows into the new year despite the negative supply and demand variables? In light of the bearish fundamental developments, I see three factors. First is the belief that we are going to experience supply destruction due to higher input costs.

Second is the expectation of inflation. Money markets are paying basically nothing, the stock market is nervous as a cat on a hot tin roof and the housing market is in a major slump. This has pushed many domestic and international investors to consider commodities. The attitude of outside
investors is that while there may be some downside risk with commodities, it's far less than other alternatives, and the upside is significant.

Jobs, jobs, jobs. The third reason for the rally is the massive governmental stimulation, which means more dollars chasing fewer goods, spurring higher prices. The problem: Giving people money is not going to stimulate the economy long term. They are going to save it or pay off debt. We need to create jobs—not at the governmental level but in the private sector. The new administration has several big decisions to make. I think everyone is willing to give President Barack Obama and his team a chance to act, but if things don't look better by the fall of 2009 and the government has already spent its money, things could get real salty in the consumer sector.

As an industry, agriculture is really in the driver's seat right now for economic growth. The long-term outlook for food consumption and for industrial and energy needs is promising. My biggest concern is that if the general economy does not begin to

recover by mid 2009, everyone will start looking at the prosperous time that agriculture is having and wonder, When is its turn for pain?
So what should we be doing? Don't try to outguess the market, but use it to achieve what you want—a decent return on investment. When crop prices are above the cost of production, be ready to reap the benefits!

The information provided is believed to be reliable. There is a risk of loss associated with trading futures and options. Anyone acting on this information is doing so at his or her own risk. Consult your Risk Disclosure Statement before trading. To comment on Outlook, e-mail For information on risks and strategies or to subscribe to Bob Utterback's Internet site or e-mail service ($400 per year), call (765) 339-7704 or e-mail You can read daily comments from Utterback after markets close at

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