How Many Lexions Will We Need? Risk Meets Acreage Projections

     Last week I got to visit the London Ontario farm show.  I was very impressed with the amount of equipment at the show and also the amount of information that I was able to garner for my farming operation.  As some of you surely know I spend a few days every February at the Louisville Farm show.  While I still consider that to be a great show and one that I hate to miss, the London show in southwestern Ontario is getting in that category.

I have spoken about the grain markets at the London show for the last 6 or 7 years.  So maybe this year when I was not scheduled to speak there, I had much more time to look around.  I spent much of the day talking to chemical reps on how to fight Roundup Ready Giant Ragweed.  The rest of the time was spent learning more about automatic steering systems and visiting with friends.

I really like Lexion combines.  I get to review them in Country Guide magazine, and the London show did not disappoint with the new Lexion 750 on display.  As I stared at the big combine, a few of the guys gathered around and we started debating how much it costs.  The answer to that question is somewhere between $500,000 and $750,000.  Then the discussion went into land prices and how many of these combines we might need.  Oh, how times are changed even from 5 years ago when we were marching across Ontario at farm rallies asking for an agricultural safety net.  Adjusting to this new reality is still job one for me.

Much has been written about how the price of corn has changed the reality in farm country across the great North American Corn Belt.  For instance this is simplifying it a bit, but you could argue that corn and ethanol combined with increased demand from foreign countries has helped this process.  Of course, what happens now?  Will we be able to buy those Lexion combines next year?

The answer is yes, at least until 2014 because our friend Ben Bernake has promised us to keep interest rates low until then.  So if you have a little bit of equity, you’re off to the races.  The harder part might be where grain prices might go.  Our friends at the USDA will have much to say about that Friday when they release stocks and on March 30 when they give us our prospective plantings for 2012.

You can almost see a limit move coming on March 30th.  Since 2005 when the position limits were expanded at the Chicago Mercantile exchange, limit moves on report days have been more common.  The frenetic volatile reaction from the noncommercial trade to even little moves in the fundamentals often causes corn prices to react violently.  6 out of the last 6 years the January USDA report has had a limit move.  Surely, next January will be the same.  Why not March too?

Of course the world is a little bit different since the January report was released.  Early reports from twitter followers in South America said there was a drought problem in both Argentina and Brazil.  The South American prognosticators as well as USDA have been slow to report this.  For instance this morning CONAB came out with 68.75 MMT for Brazilian soybeans and 61.69 MMT for corn.  This has been a long way down since USDA projected 75MMT late last year.  The bottom line is South American production is down and the Friday USDA report should show some updated numbers on production and world stocks.

I have a hard time buying into the 94 to 98 million acre 2012 corn number.  Soybeans have fought hard over the last 6 weeks to get back some of that acreage.  Let’s just say this, especially in 2012; it’s a long road until the combines stop this fall.  There is a tremendous amount of risk that is being assumed in the projection numbers.  We are not Greece.  Let’s not count our chickens before they hatch, especially in the 2012 crop year where global demand just keeps rising.

There surely is a reckoning coming.  The difference between old crop and new crop fundamentals in all the grains needs to be rectified.  Time always brings this together.  There will be lots of gnashing of teeth on the way.  Keep in mind; nobody knows what price will do.  Bullish futures spreads don’t lie but even they don’t take away the daily violent volatility.  If you’re going to buy that Lexion, I have no problem.  However, the road ahead, especially in the next few weeks, may surely challenge your trigger finger.