USDA Sucker Punch Latest Example Of How Things Have Changed

It was like a sucker punch in a boxing match.  Last Friday the USDA came out and put the 2006/07 corn crop at 10.535 billion bushels, down from the December 2006 estimate of 10.735.  For farmers, traders, brokers, grain liars and end users, it was like a referee had separated the players and as they dropped back, Mother Nature reached out and slugged them.

Most of the pros weren’t expecting such a cut.  A crop that looked to be way over 11 billion bushels last July, is now 600 million bushels less than 2005 and a whopping 1.3 billion bushels less than 2004.  Clearly, somebody was caught with their pants down.  Market reacted violently with corn limit up and soybeans catching some air.  We’ve got a long way to go baby.  The question is can we get there in 2007?

What you say?  It is some very rare air and its palpable almost everywhere you go in farm country.  This past week I traveled to Fort Wayne Indiana to put in some time at the Fort Wayne Farm Show.  It’s not Louisville for sure.  However, it might scare me to go to Louisville this year.  At Fort Wayne farmers were spending money.  They were booking corn that day for $3.90 U.S. bushel.  Farmers were wearing that 10.535 billion bushels like a badge.

Of course we’ve all been there, when USDA says there is more grain than they thought.  Who knows, that may yet happen.  It’s hard to imagine American livestock producers recoiling under such elevated prices.  However, USDA is pretty resolute for 2007.  We might have lighter weights for hogs and cattle, but prices should remain buoyant.

Is there any sanity to this?  Can we catch our breath long enough to consider just what’s happening long enough.  Answer me this question.  Why was it that last September 12th, the nearby futures month for corn was $2.29 per bushel?  Why was it that farmers like myself stood up at several farm rallies over the last year in defense of a risk management program which would work for farmers?  What was the world like then?  Is it really so different now?  Or is it a simple fact that corn end users just wanted the corn too cheap and couldn’t see the forest for the trees?

It’s something I struggle with a bit.  At the last farm rally near Wallaceburg I announced that cash prices for corn had fallen to $2.15 bushel.  I said it was unsustainable over time and boy was I right for the wrong reasons.  Around the same time I kept wondering why end users weren’t buying corn hand over foot.  Corn was cheap and nobody it seemed wanted to admit that.  Something seemed very, very wrong.

Hindsight is always 20/20.  The nearby March futures month for corn is now $4.12, almost twice the price as it was last summer.  Still, I find it hard to believe it happened so hard, so fast.  As one grower told me recently, there really isn’t a shortage of corn is there?  I had to laugh.  I mean; there wasn’t a bone-numbing drought last summer was there?  Can it go down just as fast?  No, nobody wants to go there.

So volatility, yes, hocus pocus, yes, but what happens next is anybody’s guess.  Clearly, we are in a very new world.  Companies like Pepsi and Coke are recoiling over the “perceived” higher prices of corn sweeteners.  Last week Tyson, the large American chicken processor opened a cattle feed lot in Argentina signaling what might be a trend for meat production to move overseas.  Think about Wal-mart and its supplier called China.  Is this type of paradigm seismic shift what we’re seeing in North American agriculture?

It may be, but why was it last summer that everything seemed to turn on a dime?  Now we have the third largest American corn crop in history something that would usually send market conditions on a yearlong bender only to manifest themselves in the opposite way.  Maybe that’s why so many mistakes were made.  As I’ve said many times before, this is not your father’s market.  Looking back won’t give us the proper clues on what lies ahead.

So in January 2007 everybody’s an expert now.  It would seem the experts don’t believe there will be any gaps between ethanol capacity and corn production.  It would seem many people are now saying corn prices will remain at higher levels for many years to come.

The hype bandwagon is playing like never before.  Is it like the dance band on the Titanic?  I don’t think so.  However, just remember.  It was only 16 short weeks ago our agricultural world was so pessimistic, grain was being dumped in Ontario just to make room for harvest.  Now it’s like a new world.  Is it real?  Well, I pinched myself and it hurt.  Nobody for sure knows what lies ahead.