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Experts: Low U.S. dollar, pricey oil best for grains

By LINDA McGURK
Indiana Correspondent

COVINGTON, Ind. — For grain producers wondering when commodities prices will rebound and how to market their corn inventory amid what appears to be a deepening recession, good advice is hard to come by.

Fear and volatility rule world markets right now, and nobody knows when the economy will start to turn around. That was the grim message from a panel of grain marketing experts during a Dec. 2 crop management and market outlook seminar in Covington, Ind.
“I’ve been in the business 32, 33 years, and this is the scariest time I’ve ever seen,” Paul Cooley of ADM Investor Services told more than 100 grain producers participating in the seminar.

“We don’t know what’s going on in this market. The first thing we look at in the morning is not grain prices, it’s crude (oil),” said Wayne Nelson of L&M Commodities. “We need corn prices to go up, to get you guys to plant corn. But as long as crude is under $50, it’s hard for ethanol to compete; we need crude to be back around $60.”

Nelson said a demand increase is needed around the world to boost grain prices. “I think we need to be very patient, but I think we’ll see better prices. But December looks like another disturbing month.”

He speculated that a second stimulus package, favored by President-elect Obama, could give markets a bounce after he takes office. “The government botched the first bailout package. It didn’t go to the right people and it didn’t get the credit flowing,” Nelson said.

Corinne Alexander, a Purdue University agricultural economist, said the strengthening of the U.S. dollar is partially responsible for the drop in grain prices. Since last summer the dollar has gained 19 percent compared with major world currencies, including the yen and the euro, and that alone equals a drop in corn prices from $6 to $3.75 per bushel, she said.

“People send their money to the U.S., because they believe it’s the safest currency,” she said. “As the dollar gets stronger we see a decrease in exports. We want to see the dollar stay flat or weaken – that’d be good for grain prices.”

Increasing the blend of ethanol in gasoline would be another way of boosting corn prices and the demand for ethanol, Cooley said. “We’ll see if we can get some of the farm groups excited about it.”
On the soybean side, the panel saw more reason for optimism.
“The soybean picture looks better right now. Stocks are tight and Brazil has a dismal economy right now, which may translate to less expansion for them than usual,” Alexander said.

Since U.S. biodiesel production currently only requires 15 percent of its soybean oil, biodiesel is also less vulnerable to falling diesel prices than ethanol is to decreasing gas prices. Alexander predicted grain prices could edge higher in late February or early March, when reports about farmers’ planting intentions are released and grain users try to secure their acres.

The panel also commented on a report released last week by the National Bureau of Economic Research that confirmed the U.S. fell into a recession one year ago. After the report, the Dow Jones Industrial Average fell by nearly 700 points, drastically putting an end to a five-day rally.

“The markets are ruled by fear right now. Everybody knew we were in a recession, but the market was surprised at how long it’s lasted,” Alexander said. She added that the longest recession since World War II lasted for 16 months, whereas the current downturn has already lasted for 12, with no end in sight.

“Optimistically, I’d say the U.S. economy could start growing six months from now. Pessimistically, it could be 18 months,” she said.
The panelist said the new administration will probably pass another stimulus package, adding to the current tab of $1.4 trillion of government stimulus spending. “Standard textbook economics say that this will cause inflation, but only if the economy is growing. Right now the economy is contracting. The big risk now is deflation,” Alexander said.

The seminar was sponsored by Bi-State Agricultural Programs, a collaboration between the extension services of Purdue and the University of Illinois.

12/10/2008