Published: May 20, 2008 05:03 pm            

Grain Angles: Oil market lubes grain prices

Originally published in the May 16, 2008, print edition.

The price of a barrel of oil continues to move higher which is one of the factors that keep grain moving higher.

The most recent U.S. Department of Agriculture Supply and Demand Report showed the supply of corn and soybeans getting tighter. The Commodity Research Bureau index is also putting in a double top at 422.

Planting delays are giving the market something to work with because it is critical that we hit trendline yields of corn and soybeans to meet the demand.

The one thing that is getting everyone’s attention is the widening basis levels. As the market increases, the basis will widened out which is normal. Basis levels are probably wider than we are used to.

The future prices we are experiencing have put a lot of pressure on the margin accounts of all grain buyers. There is no exception from the smallest buyer to the largest buyers in the world. Basis levels are as wide as they are because no one can to afford to margin grain any further. There is only so much capital available to anyone to continue to margin hedge accounts and any new purchases need to be hedged. Most buyers are trying to hang on to the hedges they have and not increase their exposure to any more positions.

July and December corn are both pushing through their highs. July corn has a high of $6.34 and December corn high of $6.49. Corn futures in the last two weeks are up 40 to 44 cents.

Continued weather delays, which will impact hitting the trendline yield, are supportive to corn. Shrinking the carryover to 763 million bushels is also supportive. The adjustment to the soybean carryover has also provided support to this market.

Supplies less than 200 million bushels put stocks extraordinarily tight. The market has been demand-driven and with supplies starting to tighten up this could be an explosive situation going into the summer.

There is no way to know for sure what will happen throughout the growing season. Markets are most bullish at the top and things are bullish. No one is suggesting that this is a top because production problems this summer will result in a higher market.

It is difficult how the outside markets will impact the price of grain. We do not know what the impact of oil, stocks and gold could have on the market. Government policy could change which would have effects that would be hard to imagine.

The whipping post in all of this has been ethanol which is not fair but it is the lightening rod right now. What impact will changes in the U.S. renewable fuels policy have on grain prices and fuel prices which will continue to drive up the cost of production?

In this rising market it is important to shop for the best basis. No one appears to be bidding for grains too far out so forward sales are going to be tough. Even in the face of wide basis levels sales will have to be made to maintain cash flow.

        

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