More than likely, you will be reading this month's comments on the run as you prepare for planting season. Heading to the field is a welcome relief after watching corn and bean markets retreat from summer highs to December lows.
Supply and demand. Producers tell me they are holding more inventory than normal. The reasons vary from "I thought prices were going to be higher” to "I could not forward sell because the elevator was not taking bids, so I simply won't sell until it's in the bin.” For whatever reason, producers are sitting on a large pile of old crop.
It also appears farmers have sold very little of planned 2009 corn and beans. The most common reason is their production costs are high and the current futures prices are below the break-even level. However, end users don't really care what it costs to produce a crop. Their motivation is to get inventory bought as cheaply as possible. Just because you have high costs does not mean the market has to go up; just ask the auto industry about cost versus demand!
I expect the demand side of the ledger is not going to have as many surprises as in the past few years. The global market is in a demand-contracting mode that will likely last most of 2009 and well into 2010. Consumers have been hurt; they need to rebuild their reserves. The result is that inflation will surface a lot more slowly than historical recoveries after recession. So, if we take away demand growth and inflationary concerns, the only player left is reduced supply due to weather. I have found throughout the years that trying to predict weather is like trying to catch a falling knife. Unless you're just perfect, the potential pain far outweighs the gain.
Impact of inputs. The primary inputs that have impacted your bottom line during the past few years are energy (specifically gasoline and diesel), fertilizer and interest. The sharp drop in global demand for energy distillants has caused the supply on hand to overshadow the level of demand. This has lead to a sharp drop in crude oil prices. Crude oil producers are working hard to reduce supply and should have inventories back in line by summer. I recommend that farmers forward buy all fuel needs when crude prices fall below $40.
Looking to 2010, the possibility of more corn acres could once again increase the demand for fertilizer, making forward buying attractive.
In regard to interest rates, I have to urge in the strongest terms possible that we are at historically low interest rates and decisions need to be made now to take advantage of the eventually significant upside potential of interest rates. A short selling strategy for 10-year treasury or 30-year bonds is strongly recommended.
Survival tactics. This is a year to simply survive, rather than try to hit home runs. I hope you have taken out crop insurance. I like revenue assurance at the 80% level. I'd be extremely aggressive in selling cash in April and May. Place stops below and an objective above for all commodities. Once cash sales are made, focus on aggressive management of upside risk by buying calls only on any technical breakout signals and equally aggressive liquidation if the trend does not follow through. This is not a year to hold your calls and allow a lot of time to pass while you wait for the right to have upside price protection.
The corn market experienced a solid sell-off in January and February on bearish internal fundamentals (weak demand and building carryover) as well as weak outside markets. I am concerned for producers who have large amounts of 2008 harvest unsold and, at the same time, very little sold for 2009 because costs are higher than the market price. While I don't expect producers to aggressively sell cash at the current time, it suggests a dangerous situation is developing for July 4 and later. I believe most producers are now going to hold inventory for some type of weather scare.
- Early Spring 2009