Actually, I hate using the phrase “new era” because it implies that commodity prices are going to a much higher price level and staying there. That may or may not be the case. There's little question that soybean and corn prices are in the midst of major bull markets as I write this, and of course the question is how high is high and will the prices stay at these lofty levels.
There's no question that the structure and the fundamental influences on grain commodities is going through dramatic change — and these changes are here to stay for a long time. They include:
The biofuel industry is supplying a huge increase in demand.
The money flowing into commodity and index funds has increased significantly, which further increases buying power in futures markets.
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.
The markets have made such a dramatic move since the first of October, it's difficult for anyone to stay fastened in their seatbelt. Buyers always want to buy at last week's lows, and sellers are not sure what to do.
It's important in this market to keep a perspective and to recognize that as a seller most producers are always marketing at least two years' crops. Know in advance what will make you happy or unhappy in this kind of a market.
For example, if you are 50% 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% priced on two years of production. Some people will view that as too much and some as too little. Some producers want to be long two years' crop at the same time.
One issue to always remember is 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's 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.
Corn and soybean markets are both trying to “buy” acres at this point in time. Most key planting decisions will be made prior to 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.
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'm right on this theory, remember this old adage: “When prices are profitable and you aren't certain where prices are headed, sell something and hope you're wrong on that sale.”
Political Battle Ahead
There will likely be a political battle ahead on subsidies for the ethanol industry. There's little doubt in my mind that the supports will continue.
But now put yourself in the position of a pork producer, poultry conglomerate, large dairy farmer or a food processor. Their argument, and they have a strong one, is why should the government be supporting the ethanol industry and driving up corn and soybean prices at their expense?
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.