Staring Down Uncertainty: Four Stories Prompting Questions
Jan 09, 2012
Our firm attends quite a few industry events as a way of getting out and talking to farmers. Any given trade show or conference can give us a good pulse on what’s happening and what’s on farmers’ minds.
Usually we’re asked the standard question: "Where are commodity prices heading?" At last month’s Nebraska Power Farming Show, the questions had a strategic tone to them. Farmers were asking how certain events might affect commodity prices. They wanted to be prepared for the "what ifs." They wanted to know: How high might prices go? How low might prices go?
World events impact prices, sometimes in ways that can be difficult to grasp. World events are also unpredictable. And so it is right that farmers are asking questions about being strategically prepared in the face of uncertainty.
Here are the four big stories they asked about—the stories that are compelling farmers to be strategically prepared:
European debt crisis
Q. How is the situation in Europe going to impact our commodity markets? What should we watch for?
A. Unfortunately, this is something we will continue to hear about for quite a while. News on the debt crisis moves the market. Why? Uncertainty. Hedge fund managers and other commodity investors are skittish. Perception of what could happen is what fuels volatility. There’s a nagging feeling that everything could collapse, and so investors are always moving money to the safe haven du jour. The real problem here is not a specific trend. It’s not fear of declining exports to Europe, which are already down 30 percent since 2007. The problem is, simply, general uncertainty and investor skittishness.
Q: We are concerned about the effect of China overheating. Is China pulling back to slow down its economy?
A: Commodity demand from China has been hand-to-mouth. The country has not been stockpiling like in the past, and that has hurt our exports. China experienced a really nice growing season for corn and soybeans, and in turn cut back to one-third of what they imported in beans and corn from the U.S. over last year. The root of China potentially overheating is real estate driven. Its real estate market is overbuilt and could cause them economic headaches. What’s most important to watch is what the U.S. dollar does – a higher dollar would hurt exports and place even more pressure on commodity prices.
Negativity toward USDA reports
Q: If we can’t trust the numbers, what can we do?
A: The next report comes out January 12. Pay attention to all reports and be alert to opportunities, yet don’t stake your marketing decisions on them. For years these reports have been creating stress. Often a number is a surprise because it is unexpected, and it is unexpected because it makes no sense based on the common knowledge that is out there. The market moves based on surprises. Usually, within a couple days after the report, the market resumes the original trend that was in place, and all the hoopla and news surrounding the report turns out to be nothing more than a distraction. If the report does change the trend of the market, your strategy should be in place to respond to the trend or change. So the bottom line is, pre-plan what you will do when the market changes, and be disciplined to act, regardless of whether the report, or some other event, becomes the catalyst.
Ethanol blender’s credit
Q: What about the impact of this subsidy ending (which has given a 45-cent-per-gallon tax credit to ethanol blenders for the past 30 years)? Will it result in ethanol plants needing less corn?
A: As 2011 drew to a close, there was a big push from blenders to pull in higher-than-normal volumes of ethanol because they expected to lose their 45 cents for each gallon of ethanol that they mixed into gasoline. There’s another thirst for ethanol: exports. Through three quarters of 2011, we exported 640.7-million gallons. That was 240-million gallons more than all of 2010.
The tax credit had an impact. Once again, though, a bigger concern would be strengthening of the U.S. dollar relative to key export countries. If that happens, the incentive to produce so much ethanol will decline.
So how do you stare down this uncertainty? As these four ongoing news stories illustrate, there’s no way to know for certain what’s going to happen. That’s okay. You can pre-plan what you will do if prices climb a lot, fall far, or do anything in between. In essence, this is what farmers at the Nebraska Power Farming Show were asking. What could happen to prices if . . .?
Tackle uncertainty head on by developing dynamic strategies for all price scenarios to protect you from extreme risk and to capture higher prices when they’re available. That way, when the markets get emotional about European news, USDA reports, China, changes in ethanol production, or other news, you can remain level-headed.
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at email@example.com
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