Monday, January 14, 2008

Grain markets get more good news

Demand is high and the supply is not available. Soybean harvests are expected to be 6.5 % lower than last year,corn inventory will be 20 lower than the previous year, and wheat planting are expected to be less in the United States. there is no easy solution for meeting the high demand for grains. Price does not seem to be changing the demand enough to allow inventories to grow.

A main cause for this run up is the demand for ethanol. With increased demand for corn, there is more marginal crop switching which reduces the production of soybeans. Now there s a limit to the amount of switching but if ethanol takes out fixed and growing percentage of the acreage, there will be less opportunity to switch in response to price changes. We are not picking on ethanol, but it is an obvious choice. With plant and equipment built for production along with government subsidies, the demand for ethanol starts to become inelastic. The cost of producing ethanol is now a burden on traditional grain consumers who may have more elastic demand. Corn prices are up 90 percent from a year ago.

Bloomberg corn and soybean surveys still show a strong bullish bias. There is little information to suggest that prices will decline over thee next month.

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