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With better prospects, risk premium leaves grain markets

With better prospects, risk premium leaves grain markets

Corn and soybean fields with money

After weeks of big gains, the grain market has seen a quick correction with prices plummeting, particularly in corn.

A large part of the correction comes from the good spring for many farmers, as well as the May 12 Supply and Demand report from the USDA, which showed Brazil’s crop might not be as low as expected. While stocks are still tight, Don Roose, president of U.S. Commodities in West Des Moines, Iowa, said some of the premium is coming out of the market.

“That kind of put people back into a little more of a reality,” Roose said. “That was a warning sign that ending stocks, although tight, weren’t really that inflammatory. Private forecasters are coming out with higher acres than people thought, and then there’s been some moisture in some areas that needed it.”

That moisture has helped the prospects of some farmers in drier areas, allowing for the risk premium to be removed from record high prices.

After the break in prices, Roose said end users might be looking to get some coverage if they are concerned about weather this summer, saying they were “spooked” by the prospects of extremely tight supply available. With those concerns eased somewhat, they are considering the discounted new-crop contracts that sit nearly a dollar lower than current prices.

“You probably owe it to yourself to get some kind of coverage,” he said. “From a producer standpoint, we are at historically high levels that warrant risk management for those sitting on grain. You have to make sure you do something for coverage. Don’t put all your eggs in one basket.”

While the weather this growing season will impact the markets, Roose said something more will be needed to challenge the record highs seen in April.

“The cure for high prices is high prices,” Roose said. “You ration, the world produces more, the U.S. produces more and pretty soon you say ‘We’ve got more than we need.’ It wasn’t two short years ago we had such a massive supply.”

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