Let's face it—the current condition of the U.S. economy, and the world as well, will be recorded in history books. Right now it's not about the supply side of the equation; it's all about demand. Specifically, how bad will the recessionary pressure develop as banks around the world restrict their lending policies, consumers contract their buying due to uncertainty about jobs and housing, and local, state and national governments are forced to raise taxes to pay for short-term stimulus programs?
The continued drop in crude oil prices reflects extremely negative expectations about near-term global demand. This, in turn, is pressuring ethanol plants. The big uncertainty for corn ethanol and soybean biodiesel during the coming months is whether or not USDA will readjust its corn ethanol demand at the same time that government mandates for cleaner fuels are increasing.
Finally, how will the new administration react in terms of new regulations in the wake of the financial crisis? The biggest fear is that by the time the government gets around to holding hearings, developing regulations and implementing a solution, the resulting policy will be the next problem for the market.
The overall concern: Does government policy act to restrict the free flow of money in and out of commodities? I believe all politicians have figured out that high fuel prices and high food prices are not a good way to get re-elected. One has to assume there will be no aggressive movement by the next administration to support policies that will allow $8 corn and $20 beans anytime soon.
Bottom line: I sense everyone is in a hurry to buy the low and get the market rallying. My concern is we could experience a very limited price recovery well into 2009, which will only frustrate everyone who is holding unpriced inven-tory in the bin.
As for the end user who must consider buying feed needs for the next year, 2009 could be the year to lock up supplies below the cost of production. This means you need to watch the market for a multiple-year feed-buying strategy.
It will be very difficult to make money holding corn unpriced into next spring. I would suggest at the very least focusing on selling out-of-the-money calls at your price objective to help pay for storage. Upside objectives should be kept very conservative; a move into the mid-$4 range is about all one should really expect.
Yields are not improving, and demand is suffering. I continue to see increasing acres domestically and internationally, which should make it difficult for soybeans to rally. Equally, the market is at levels where it is difficult to be bearish. Like the corn strategy, I like selling deep-out-of-the-money calls on rallies at the strike price you want to sell. Equally, I realize buying out-of-the-money puts for disaster protection is distasteful, but it could still bear good fruit if this global economy suffers more than expected.
- Mid-November 2008