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Expert: Sell small loads, seize high prices, if possible

By TIM THORNBERRY
Kentucky Correspondent

LEXINGTON, Ky. — For anyone who has followed the financial markets during the past several weeks, one thing is certain: Those markets are uncertain.

They have fluctuated from one extreme to the other, making even the most seasoned investor weary. Commodities markets have not been much different – the swings have been just as turbulent, leaving many producers guessing what to do next.

Just a couple of weeks ago many Kentucky wheat producers were deciding to forego a winter wheat crop because of high input cost and wait for full season soybeans. Now corn producers are debating storing some of this year’s harvested crop in hopes the price will go up.

One bright spot is that the cost of fuel and fertilizer has been falling rapidly, something farmers have been hoping for – but it’s just one more thing to add to the confusion.

There are many reasons for the turmoil, according to University of Kentucky agricultural economist Cory Walters, beginning with the primary financial markets. “The financial markets have negatively affected the commodities markets to some degree. Prices for corn, soybeans and soft red wheat have all gone down,” he said.

But for how long is the question. As of last Friday, the grains markets saw a slight rise on the heels of a midday upswing on Wall Street. Fortunately, the commodities markets closed before the financial markets, leaving those increases intact. In contrast, the Dow Jones Industrial Average fell by more than 300 points by the end of the day.

But all can’t be blamed on Wall Street. Supply and demand has played a major role in lower grain prices. Both wheat and corn have enjoyed near-record production, creating an ample supply throughout the world which naturally would bring prices down.

“When you take good prices and turn around and produce the second largest corn crop on record, you’re putting a lot of corn out there and that can only do one thing, and that’s to put negative pressure on prices,” said Walters.

He added that normally a large yield this year would mean lower prices next year, but not much of the corn will be carried over.
“We’re not taking very much corn into next year. The stock going into next year is projected to be around 1.12 billion bushels and that is about the third smallest (amount) in the last ten years,” he said.

Walters also said the small carryover is attributed to so much corn being used for ethanol. There has been a sizable increase in the amount of corn that has been used for fuel just in the last year. According to the Energy Information Administration, “as of March 2008, United States’ ethanol production capacity was at 7.2 billion gallons, with an additional 6.2 billion gallons of capacity under construction.”

About 4 billion bushels of corn are expected to be used to produce ethanol, said Walters. Out of all the uses of corn, ethanol is expected to use about 33 percent of the crop. The corn market is tied closely to the fuel market because of the large percentage of the crop going toward fuel production.

“If fuel prices go up, then a high chance exists that corn prices will also go up,” said Walters. But, fuel prices have fallen drastically over the last few weeks, bringing relief even at the cost of corn prices.

While the amount of corn going into next year is small, carryover supplies for soybeans at this point are looking close to normal, despite early estimates of a tight supply. Looking at carryover supplies over the last 10 years, this year’s amount is roughly in the middle, said Walters. “We’re taking a relatively normal amount of soybeans into next year.”

What it all means

One thing to put into perspective regarding the up-and-down market is how prices have fared over the long term.

Walters said the average corn price from 1980-2007 was about $2.58 and the corn price for the December contract on the Chicago Board of Trade was roughly $3.70-$3.80, approximately a 46 increase in corn prices. Many producers, he said, are just looking back to that July 2008 high of $7.

“You need to go back a year from now and see where corn prices were, and you find that they were very similar to what it is now,” said Walters. “A lot of things lined up at the same time to make that price go up in a short period of time.

“There’s so much that can influence these markets now and any amount of uncertainty that enters these markets can make them change significantly. I think what all this has done is to show the importance of marketing decisions.”

Walters suggests that producers should sell in small percentages and, if possible, take advantage of positive price swings. “If you can sell and make money, do it and don’t look back,” he said.

11/19/2008