First, USDA Chief Economist Keith Collins tells the Senate that ethanol producers will need one billion more bushels of corn in 2007 than in 2006, and corn futures exploded upward Thursday. Then USDA’s final 2006 crop report reduced the production estimate by 210 million bushels putting the stocks to use ratio at the second least ever, and corn futures closed limit up Friday. The farm gate does not make market predictions, but when trading resumes Tuesday, there may still be some pent-up demand to own corn. And you are not the only one wondering where the top of the market may be.

You are joined by many others, including Purdue agricultural economist Chris Hurt, whose monthly corn newsletter headline rhetorically asks, “Where’s the Top?”

Hurt says the 6.4% stocks to use ratio is the tightest ever, surpassed only by the 5% at the end of the 1995/1996 marketing year when corn prices exceeded $5. That was when many farmers were defaulting on their $2.50 forward contracts and rolling hedge-to-arrive contracts into oblivion. Hurt says corn supplies are not only tight in the US, but throughout the world with only a 10.7% stocks to use ratio.

When supplies are tight and prices are high, demand begins to be rationed, but Hurt says that has not yet appeared. Ethanol producers continue to buy corn. Export business is brisk, with the help of the cheap dollar, and domestic livestock herds continue to expand despite the upward corn price movement last fall.

Hurt says the 1996 experience was a $5.55 high for corn futures, but the average farm price was only $3.24 for the year. He says the market is poised to drive well into the $4.00 range on Tuesday, with $4.50 the next marketing objective. So what should you watch to be assured the bull market is not about to stop at a fence? Hurt says there are several factors that will point to the health of the market:

1) Watch the weekly export purchases, which could be fueled by the exchange rate, but if there is a buying spree gauge the volume being sold.
2) Watch the domestic corn use, which will taper off just before the price peaks. The next indicator will be the USDA’s grain stocks report on March 30 that shows the rate of disappearance.
3) Also watch the Prospective Plantings Report on March 30. Hurt says if it does not show an 8-10 million acre increase in corn, there could be another spurt upward in the market.
4) The weather could spark higher prices, if spring or early summer weather is a challenge for planting and pollination. Hurt says, “If weather is at least normal or better than normal this growing year, prices will be lower in mid and late summer than they are in late winter and early spring. And if there are yield threats, the $5.55 mark has much higher odds of being tested or exceeded this year.”

So how do you re-work your corn marketing plan? Chris Hurt says, “For new crop pricing, December 07 futures will have to move higher relative to soybeans to get even more acres. Using a conventional strategy of pricing 25% to 35% of the 2007 crop in the mid-February to mid-May period now seems reasonable.” A major point that Hurt makes is that you do need to sell your crop, and not hang onto it awaiting prices that will never come. As corn prices go higher, they will move above the break-even cost of many end users and those end users will stop buying corn, until prices retreat.

Although the soybean market has many bearish fundamentals, bean prices have chased corn prices higher, says Chris Hurt in his monthly soybean marketing letter, despite the fact corn prices need to move high enough above bean prices to buy a sufficient amount of acreage. Although Friday’s USDA crop report contained no surprises for beans, some futures contracts climbed over 40 cents because of the bullishness in the corn market.

Hurt says old crop beans have been trading at 180% of corn, so a $4.50 corn price indicates a potential $8.00 corn price. Those are high prices, even with a low stocks to use ratio. He says corn and bean prices “are linked at the hip” currently because of the relationship of Midwestern acreage, but bean prices will have to unhook at some point. Soybean exports have not been seriously affected by the higher prices, which could be a function of the exchange rate that is advantageous to foreign customers.

Chris Hurt says Prospective Plantings report will tell much about the 2007 soybean crop which could decline in acreage 7-8 million acres, if there is a 10 million acre boost in corn. Such a decline might produce a 2.7 billion bushel soybean crop with trend yields.

If you have old crop soybeans to sell, Hurt says watch for a peak in the corn market, because there is a large volume of old crop beans that need to be sold and many producers will sell as corn pulls soybeans higher until acreage numbers are known. He says mid-March to mid-May is the best time to sell beans, regardless whether it is an average year or a high price year for beans. But he says late-winter to early spring can also provide healthy prices.

In the event of bad weather, which would inflate corn prices further, soybean prices could also rise through the summer. Hurt says there are numerous ways to protect your revenue, either storing beans for cash sales, buying futures to replace prior cash sales, or using call options to replace prior cash sales.

Summary:
Tight corn supplies have driven the value upward, providing unusually high cash and futures prices. However, as those prices move above breakeven levels for corn users, demand will slow and prices will peak, then retreat to lower levels. Producers should closely watch export sales and domestic use as indicators of a peak in demand. Because of the acreage connection, soybean prices have also climbed even though there is a surplus of soybeans. Producers with stored beans should watch the signals for a peak in the corn market, because many beans need to be sold, and prices could rapidly fall.