For many years I've listened to producers talk about markets going to a “new plateau” almost every time grain prices rallied. It of course never happened. But this time, I would have to admit that the new plateau theory is for real. The world has definitely changed.
The world of agriculture has been jolted by two enormous fundamental changes within the last two years that we have never faced before. The first is the ethanol industry and the amount of corn it will be using, and the second is China.
The modernization of China is having much more impact on the world than many expected. In the last two years the Chinese stock market has nearly doubled in value. This has created enormous amounts of wealth and buying power — for things and for food. China's diet has been improving rapidly. Once that trend begins, they will not go backward.
THIS NEWS IS nothing shocking or new to any of you. Corn usage for ethanol next year should be over twice what we export (4.2 billion bushels). Thus far, however, production is keeping up with this demand. Ethanol demand creates a stable and long-term increase in demand and is not going to go away.
Add to these two fundamental changes two other ingredients that have added fuel to the fire of this bull market in corn and soybeans:
Crude oil prices, as I write this, are over $90/barrel. This is inflationary and supportive for ethanol prices.
More importantly, however, is the influence of Index Funds (the funds that can only buy).
Billions of dollars have flown into these funds in the last couple of years. The Goldman Sachs fund, the biggest of all, exceeded $100 billion a couple of months ago. Of that amount, 8.2% is invested in the grain market. That's $8.2 billion dollars of buying power for corn, soybeans and wheat. That creates an artificial demand that the market has never experienced.
It's easy to get over enthused with all of this bullish news. But as in any market, what price levels do these new bullish fundamentals justify? Does this demand mean we have a shortage of $3 corn, $4 corn or $5 corn? Do we have a shortage of $9 beans, $10 beans, $12 beans or $15 beans?
IT IS CLEAR THE MARKET near-term has a shortage of $4 corn and a shortage of $10 soybeans. Within the next six months my guess is we'll realize the market does not have a shortage of $4.50 corn nor does it have a shortage of $13 soybeans. We will likely have a surplus of those two varieties.
Somewhere in between, these markets will find a happy medium. This is new territory for everyone in the price forecasting business. Consequently, it is my feeling you should be making marketing decisions based upon the profitability of your farm and not based entirely upon where you think this market is headed. No one knows for sure in this environment. When prices are profitable and the trend is uncertain, sell something and hope you are wrong. You always have more to sell.
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.