GRAINS & OILSEEDS. Long-term themes for grain and soybeans prices

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1 GRAINS & OILSEEDS Long-tem themes fo gain and soybeans pices The main long-tem theme fo con, wheat and soybean pices is that pices on an inflation-adjusted basis have been tending lowe since the 1960s. The neaby chat shows eal gain and soybean pices back to 1960, with the histoical pice histoy adjusted with the CPI so that the pice histoy is in tems of 2006 dollas. The cuent soybean pice nea $5.75 pe bushel is about one-thid of the $15.40 pice (in 2006 dolla tems) seen back in The cuent wheat pice of $3.50 is about one-quate of the $14.00 pice (in 2006 tems) seen in The cuent pice of con nea $2.40 is about one-thid of the $7.86 pice (in 2006 dollas) seen back in The downwad tend in the inflation-adjusted pice of gain and soybean pices attests to the success of the wold agicultue maket in poducing enough food to feed the wold's gowing population. The downwad tend in eal gain and soybean pices is a clea ejection of the Malthusian nightmae of global food shotages (Thomas Malthus in 1798 wote: "the powe of the population is indefinitely geate than the powe in the eath to poduce subsistence fo man"). In fact, wold agicultual poduces ae moe than keeping up with demand. Thee is enough supply and competition among poduces to foce pices downwad on an inflation-adjusted basis. Looking ahead, cop yields and output ae likely to continue to gow with new advances in genetics and bio-engineeing. Indeed, con poduction in the cental Midwest duing the summe of 2005 supised obseves on the upside because dought-esistant con was able to come though the summe dought much bette than any con in the past could have. In any case, high poduction and low eal pices constitute welcome news fo wold consumes and fo the govenments that ae ultimately esponsible fo feeding thei people. The downwad tend in eal gain and soybean pices, by contast, offes pain fo the wold's fames. e gain and soybean pices bing lowe evenues to fames. At the same time, the cost of poduction continually ises in the fom of highe costs fo labo, fuel, fetilize, pesticides, iigation and othe inputs. This has put a tight squeeze on agicultual pofits, paticulaly in the US and othe industialized counties whee labo costs ae high. Indeed, the squeeze on pofitability has diven many small family fams out of business and tuned US agicultue into an industy that is inceasingly dominated by lage copoations. Copoations can achieve lowe costs and geneate bette pofitability with economies of scale. Yet thee is a sense of sadness as the US loses the family fams that though the 1800s and 1900s helped build the US agicultual industy into the global powehouse that is it is today. Long-tem US aceage planting tends The neaby chat of US planting tends, which incopoates data fom the CRB Commodity book 2006, shows how con a centuy ago in 1900 was the dominant cop in the US, with con aceage about twice that of wheat aceage. Aces planted with wheat have fluctuated in a wide ange but have moved basically sideways in the past 100 yeas and cuent wheat planting aceage in the US isn't much diffeent than it was back in The most stiking aspect of the chat is the ise of soybeans as a US cop in the 1930s and 1940s, and paticulaly afte Wold Wa II. In fact, US aces planted with soybeans is now only mildly below that of con. Con aces fell fom 1930 though the 1970s to accommodate the highe aces planted with soybeans. Soybeans afte Wold Wa II became known as the "Miacle Bean." Soybean pices wee highe than con pices and soybeans wee geneally easie to gow. Demand fo soybeans quickly suged due in pat to the high potein content in soybeans. Soybean meal, with its high potein content, could be used as a supe-chage fo animal feed. Soybean oil found vey stong demand since it is nealy tasteless and cololess and is ideal fo use in pocessed foods. 172

2 GRAINS & OILSEEDS Gain & Soybean Pice Histoy Gain and soybean pices duing the 1950s and 1960s wee undoubtedly consideed at the time to be volatile by fames and maket paticipants, as pices wee buffeted by the usual fluctuations in supply due mainly to the weathe. The US govenment tied to suppot and stabilize pices in ode to suppot US fames. Howeve, by moden standads of volatility, gain and soybean pices duing the 1950s and 1960s wee emakably stable. That stability ended in the ealy 1970s, howeve, when gain and soybean pices soaed to levels that wee unimaginable at the time. In theoy, the volatility of gain and soybean pices should be tending lowe. The ise of South Ameica as a majo poduce now povides a counte-cyclical havest supply duing the winte season in the Nothen Hemisphee and also divesifies wold poduction fom a weathe standpoint. Yet a quick look at the chats shows that gain and soybean pices emain about as volatile now as they wee back in the 1980s and 1990s Soviet Gain Puchases and Inflation Stating in the summe of 1972, gain and soybean pices stated to ally shaply. Soybean pices nealy quadupled fom $3.50 pe bushel to a ecod high of $12.90 pe bushel (neaest-futues) in ealy Con pices moe than tipled fom $1.20 pe bushel in mid-1972 to nealy $4 in Wheat pices moe than tipled to as high as $6 pe bushel fom about $1.60 in mid The main facto diving that ally was the fact that the Soviet Union secetly puchased 24 million metic tons of wheat, con, soybeans and soybean meal duing the summe of The Soviets wee foced to make the puchases because of domestic shotages caused by poo cops in the Soviet Union stating in When the Soviet puchases came to light in late 1972 and ealy 1973, gain and soybean pices soaed. Soybean inventoies wee so depleted that Pesident Nixon had to impose an embago on soy meal expots so that the US would have enough soy meal fo its own needs. Pices wee also boosted in the fist half of the 1970s by the geneal suge in inflation seen in esponse to the Fedeal Reseve's expansionay monetay policy and the suge in cude oil pices caused by the Aab Oil Embago in Octobe 1973 (US inflation eached 11% in 1975). The suge in gain and soybean pices in caused the US govenment to dop its fome policy of tying to estict poduction in ode to suppot pices. Instead, the US govenment adopted policies encouaging US fames to plant as much aceage as they could to meet demand. In addition, Bazil duing the ealy 1970s quickly amped up its soybean poduction to take advantage of high pices. Bazilian soybean poduction soaed by oughly six-fold fom about 2 million metic tons in to 12.5 million metic tons just 6 yeas late in This bust of wold poduction ceated a poduction suplus of gain and soybeans, which led to extemely volatile pices though the 1970s Soviet Gain Embago The Soviet Union in the latte half of 1979 enteed the maket again to make huge puchases of US gain and soybeans, thus pushing pices highe. Howeve, in Januay 1980, Pesident Cate announced a gain embago against the Soviet Union in etaliation fo its invasion of 173

3 QUARTERLY NEAREST FUTURES Chat on 06/28/1988 Chat on 10/31/1932 CONTRACT SIZE 5,000 bushels MIN TICK.25 cents 12.5 USD / contact EACH GRID 2 cents 100 USD / contact DAILY LIMIT 20 cents 1000 USD / contact TRADING HOURS 6:33p-6:00a / 9:30a-1:15p CT OATS - CBOT Quately Neaest Futues as of 03/31/2006 Date Open 03/31/ /30/ /30/ /30/ /31/ Open Inteest Volume Annual 182, and of Oats Futues In Cents pe Bushel Souce: Chicago Boad of Tade

4 QUARTERLY NEAREST FUTURES Chat on 03/31/1948 Chat on 09/29/ OATS - INFLATION ADJUSTED Quately Neaest Futues as of 03/31/2006 Date Open 03/31/ /30/ /30/ /30/ /31/

5 MONTHLY NEAREST FUTURES Chat on 06/28/1988 Chat on 08/12/1968 CONTRACT SIZE 5,000 bushels MIN TICK.25 cents 12.5 USD / contact EACH GRID 2 cents 100 USD / contact DAILY LIMIT 20 cents 1000 USD / contact TRADING HOURS 6:33p-6:00a / 9:30a-1:15p CT OATS - CBOT Monthly Neaest Futues as of 03/31/2006 Date Open 11/30/ /31/ /31/ /28/ /31/ Open Inteest Volume MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSDM Annual 184, and of Oats Futues In Cents pe Bushel Souce: Chicago Boad of Tade

6 MONTHLY CASH Chat on 06/27/1988 Chat on 08/29/1969 Cents / bushel Oats, #2 Milling, Mpls Monthly Cash as of 03/31/2006 Date Open 11/30/ /30/ /31/ /28/ /31/ Cents / bushel MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSD MJSDM Annual Minneapolis., and of Oats In Cents pe Bushel Souce: Chicago Boad of Tade 185

7 WEEKLY NEAREST FUTURES Chat on 04/26/1996 Chat on 07/03/ CONTRACT SIZE 5,000 bushels MIN TICK.25 cents 12.5 USD / contact EACH GRID 2 cents 100 USD / contact DAILY LIMIT 20 cents 1000 USD / contact TRADING HOURS 6:33p-6:00a / 9:30a-1:15p CT 2 OATS - CBOT Weekly Neaest Futues as of 03/31/2006 Date Open 03/03/ /10/ /17/ /24/ /31/ Commecial = NonCommecial = 3059 NonRepotable = 1245 Open Inteest Volume M J J A S O N D J F 2006 Quately 186, and of Oats Futues In Cents pe Bushel Quate Quate Quate 09/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Souce: Chicago Boad of Tade

8 WEEKLY CASH Chat on 04/29/1996 Chat on 07/03/ Cents / bushel Oats, #2 Milling, Mpls Weekly Cash as of 03/31/2006 Date Open 03/03/ /10/ /17/ /24/ /31/ Cents / bushel M J J A S O N D J F 2006 Quately, and of Oats In Cents pe Bushel Quate Quate Quate 09/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Minneapolis. Souce: Chicago Boad of Tade 187