Ray Grabanski column: Inflation concerns strengthen, grains rally
Wheat Wheat was mixed again this week with slight losses on the Chicago Board of Trade and Kansas City Board of Trade, but gains on Minneapolis Grain Exchange. The market opened the week strong with all three exchanges a limit up, with MGEX leadi...
Wheat was mixed again this week with slight losses on the Chicago Board of Trade and Kansas City Board of Trade, but gains on Minneapolis Grain Exchange. The market opened the week strong with all three exchanges a limit up, with MGEX leading the way because of a strong demand and with dwindling supplies of spring wheat. There is also a need to keep prices higher to secure acres this spring to make up for the shortage since winter wheat seedings were less than expected. Jan. 29 brought some consolidation with KCBT and CBOT falling sharply lower after days of sharp gains. MGEX held onto its gains and once again closed limit up with the strong demand supporting prices. Jan. 30 once again led to consolidation on all three exchanges, after strong gains early in the week, the market was due for a correction. Additionally, fears of a recession served to add volatility to the market, particularly in Chicago, where speculative trades are more prevalent. After the market close Jan. 30, the Feds announced it will lower interest rates by 0.5 percent, which is seen to be supportive for grains. The rest of the week brought sharp gains on all three exchanges with support from the Fed's decision, strong demand and thought correction had been overdone. The need to secure acres will continue to provide support to the wheat market as well as strong demand. Export inspections also lent some support coming in above expectations.
Once again, wheat prices managed to surprise everyone with continued limit higher moves. It is highly unusual for any market to make consecutive limit moves, let alone limit higher for the better part of two weeks. Producers, as well as bankers also are anxiously awaiting these numbers, as financing will be made based on the guaranteed revenue producers can get. Once the insurance price is established, an effective floor is placed on prices much like the loan rate (or LDP) was the floor offered to all producers in past years except in this case, a producer has to buy the protection via crop insurance premiums. Even though 40 percent to 65 percent of the premium is paid by the government, it still is a choice for producers of what "floor" they want to put in, with anywhere from 70 percent to 90 percent Group Risk Income Protection coverage offered (a group or county yield concept) to 50 percent to 85 percent Revenue Assurance/Crop Revenue Coverage (based on individual yields). Both types of coverage are effective in putting price floors in place, while RA/CRC also will put a floor under individual yields by each producer (and therefore farm revenues). With so much momentum still behind this market, the best advice we can give right now is to sit back and see where it will take us. CornCorn futures were slightly higher, supported from spillover from wheat but without significant bullish movement on fears of a recession. Corn lacked the fresh fundamental news to move much in its own direction and thus looked to other grains and outside markets for influence. The week began modestly higher on spillover from neighboring grains and with supportive outside markets, also stronger than expected export inspections lent support to the already moving bullish trend. By Jan. 29, corn had turned slightly bearish but held near neutral with little significant news to push the market either way and without strong outside markets to push the market bullish. Jan. 30 led to slightly lower prices as well with little activity. With recessionary fears in the air, the market was hesitant to act until the results of a meeting of the Feds later that afternoon had been announced. The Feds announced they were cutting interest rates by 0.5 percent, which was looked upon to be supportive for grains. This and some additional support from other grains helped push corn slightly bullish Jan. 31. Overall, a pretty calm week in the corn market, with little fresh news to push the market much in either direction. Stronger-than-expected export sales and inspections also are seen to have lent support.
The Fed's willingness to cut interest rates is a positive sign for commodities, as it appears the Fed is willing to tolerate commodity inflation for now to fight a sagging economy. Its willingness to cut rates during times of rapid commodity inflation is surprising, but apparently Fed officials must know the seriousness of the problems confronting the economy. They are using just about every lever they can pull interest rate cuts via the Fed funds rate and discount rate, printing and selling more money into the money supply (via banks) and encouraging an economic stimulus program by the legislative branches of government. There aren't many more levers to pull to stimulate the economy.
Long term, this could lead to further price increases in commodities. Already in the past few months, we've seen a number of firsts: Beans in the teens; wheat in double digits (more than $10); hard red spring wheat wheat prices at a premium to soybeans; gold at more than $900; crude at more than $100; and corn prices offered at more than $5 for three years out (2008, 2009 and 2010 harvests). It's not often we see so many price obstacles fall in such short time frames, but here we are, and it's not even planting time yet.
The important thing to remember in all this is that while markets may have appeared soft the past few weeks, nothing has changed in the underlying fundamentals. This has the potential to be the most profitable level farmers have seen possibly in their lifetimes. Approach marketing with caution and moderation, and let the market work for you.
SoybeansSoybean futures finished the week higher as index fund buyers returned and traders felt more comfortable that the market had consolidated. Granted, it was a short consolidation, but given the huge volatility of the market recently, many viewed a week lower as good enough. By Feb. 1, many old crop contracts were at or near $13 with new crop prices not far behind. While the recent "break" set off quite a few nerves, we have to remember that nothing really changed. The fundamentals still were very friendly with U.S. soybean stocks still tight, inflation ideas stronger than ever and planting more than six weeks away. Fed announcements Jan. 29 reduced interest rates by another 0.5 percent on top of the 0.75 percent drop the week before. A 1.25 percent cut in rates is nearly unheard of and makes inflation in the general economy nearly impossible to avoid (especially given the expansionary monetary policy the Fed already had adapted). Seasonally, this was normal behavior as it is common for prices to break in late January to early February. Regardless, it looks like we will start February off with a bang, just as your insurance guarantees for 2008 are being set.
The outlook for all three major grains is positive this year, but soybeans have perhaps the strongest fundamentals. Corn bought acres last year with soybeans coming out the loser, which is part of the reason we are in such a tight supply situation in the first place. Wheat is attracting acres world wide, so at least there is a little cushion. Soybeans are the one grain that has yet to be the spotlight, and we need to buy at least 5 million acres to prevent a shortfall in 2008 to '09. At this point, fixing the soybean supply problem is at the top of the list, and February is the prime month to do that. It is close enough to planting that producers are less likely to change their minds and also, the Risk Management Association is setting the prices levels for revenue crop insurance products. From our view, it looks like things are warming up.
Small grainsSmall grain prices basically were stable this past week, although Minneapolis feed barley bids dropped by 25 cents to $5.70. Malt remained at $7, and durum is quoted at or near $20 in many areas. Minneapolis wheat prices have been a huge driving source of strength behind these small grain markets and likely will continue to be at least until we get some relief from the short supplies. Until hard red winter wheat harvest starts, there are few suitable substitutes for hard wheat and because of that old crop prices should remain strong and possibly continue to increase. As for 2008, durum and barley buyers probably have been the most aggressive of the specialty crops in trying to retain production. Both commodities are offering decent contracts, with malt contracts for some offering very good money. Pro Ag remains optimistic, but would like to see how prices react as we get closer to a definite planting date.
Dry beansDry bean prices remained stable as there was little fresh news to affect them. Other grain markets started to recover from the drastic losses of a week or so ago, and dry beans, for many, remain a secondary thought. Soybean prices are very enticing right now and have every reason to continue rallying. Additionally, high input costs may limit the desire to plant dry beans, although contracts are at their highest point in years. As we have said several times now, Pro Ag expects that dry bean production will dwindle during the next year as the market seeks to replace and prevent a shortfall in soybean supplies in 2008 to '09. In many areas, dry beans, at current offered prices, will be shifted to the wayside in favor of more profitable crops.
OilseedsOilseed prices started the week a little soft as nearly all commodity prices were weakened by the previous week's selloff. By Feb. 1, however, it appeared that trade was much more comfortable with where things were at, having at least put in a small consolidation. In general, though, none of the positive fundamentals supporting minor oil crops have changed. Soybeans remain in short supply for the next year or so, and even with more acres this year, it will take time to build supplies back. That leaves a nice gap of demand that can be filled by sunflowers, canola and flax, particularly with the dietary benefits that this oil tend to offer. Because the wholesale prices of vegetable oils have been so high, it opens the door for buyers to offer good incentives for production in 2008. This is most true for flax, which has lagged the boom in other markets but also has some of the shortest supplies.
For minor crops such as sunflowers, it doesn't appear to be able to keep up in new crop bids with the rapidly changing futures markets for corn, soybeans and wheat. But with 85 percent of U.S. planted annual acreage (258 million acres) in the three big crops (corn 90 million, soybeans 70 million, wheat 64 million), all other minor crops account for only 15 percent of the remaining acreage. With cotton at 10 million acres (and losing more to corn-soybeans), and other feedgrains at 15.5 million, there isn't a lot of acreage left for minor crops. If soybeans-wheat-corn bid via futures markets for more acres, it could be "bar the door" for minor crop values especially those that lose acreage to the big three crops.