Book 2010 fertilizer this summer…seriously
Farmers who bought fertilizer last summer and fall may act like a kicked puppy when it comes time to price product ahead for 2010 and beyond. But with wholesale fertilizer prices on the decline, it's time to get over it and bite back, says Farm Journal Economist Bob Utterback.
"My feeling is very strong that we're putting a low in this crude oil market in the $35 to $40/barrel level," he says. "The bottom will arrive in midsummer and we'll start an upward thrust in crude oil, contingent on how fast global economies recover."
With an expected decrease in corn acreage this year, it's possible acres could rebound in 2010, putting strain on fertilizer supplies, he says. Fertilizer producers can increase profits with lower volume, he says, so there is little incentive to keep production up. He assumes fertilizer demand in China will remain strong, particularly for potash and phosphate.
With tighter margins, Utterback says, "You have to start integrating crop insurance, options and futures into an organized plan so you know how you're going to operate six months to a year out if a price event does come to you." —Greg Vincent
Markets set to grind lower
Of the advisers we track, EHedger has the most cash sales on the books: 45% each for corn and soybeans. "We started selling when the market went into panic mode with late planting last spring," says Justin Kelly, president. "With corn futures hitting $7, it seemed demand destruction was inevitable. At the same time, rumors began to circulate that elevators were going to stop making new-crop bids. So we sold about 25%." They added to sales when elevator bids came back on line.
"Now I think we're going to grind lower and there's a good chance cash corn could drop below $3 again and soybeans below $7," Kelly says. "Farmers are holding a ton of grain that may cap rallies as they sell. Hedged or owning put options is the place to be until prices are cheaper and end-user margins improve."
Grab the carry
Any 2008 corn still held is a good investment if you capture the carry (store and sell for far-out delivery), says Jerry Gulke of Strategic Marketing Services. "March to July 2010 prices were recently 70¢/bu. better than March 2009 (not counting basis gain or on-farm storage costs). That's $140/acre profit for an Illinois farmer, likely more than we'll make planting, growing, and harvesting the 2009 crop," he says. —Linda H. Smith
If you are betting on catching summer weather rallies, don't bet on them post–July 4, cautions Kevin McNew, president of Cash Grain Bids. "On average, over the past 10-year and 20-year periods, new-crop corn and soybeans decline after July 4 by 30¢ to 40¢/bu. So get your hedges on before you watch the fireworks!"
He also recommends focusing on futures or options in the spring/summer and staying away from cash contracts. Cash Grain Bids compared new-crop basis quotes from selected elevators in Iowa and Illinois for the past 10 years earlier in the season versus harvest. It found that corn basis is 8¢ weaker and soybeans are 16¢ weaker in July than at harvest.
"So while you may hit the seasonal high for futures in early summer, chances are this is the worst time to lock in basis," McNew says. "Separating your transactions will help you better hit the peaks of these two distinct trends." —Linda H. Smith
Acreage still very much up in the air
Farmers are stuck in the middle of high fertilizer prices and tanking commodity prices, with time running out. A survey of Top Producer readers from late January to early February shows more than 60% still have not decided whether to plant corn or soybeans. In fact, nearly 30% say they won't decide until they are ready to plant (see table).
Crop rotation remains the top factor determining acreage, but close behind are commodity prices and continued high fertilizer prices, according to the survey.
For now, indications are there will be more soybeans and less corn. This makes sense, says Jerry Gulke, president of Strategic Marketing Services and Top Producer columnist. States that have seen significantly more corn acres the past two years are likely turning this tide, he says.
"Anyone who doesn't get at least 160 bu. to 170 bu. of corn struggles with being able to make it cash flow," Gulke says. "In other words, the non-I states of Iowa, Illinois and Indiana, and of course Minnesota, are probably going to shift to soybeans because they can't grow 200-bu. corn.
"In the Red River Valley, they're concerned about getting into the field," he adds. "So already, they've made commitments to maybe a 20% switch."
The delayed decisions mean you probably shouldn't put too much stock in USDA's March 31 Planting Intentions report, he says.
"Spring weather is going to be important because in northern Illinois we have a lot of field work to do, and so do a lot of other people. So, will we be able to get it all done in time? I think we probably won't know acreage for sure until June 30, because there could easily be a 5% difference between what we intend to do on March 1 and what we end up doing. That's 4 million acres of corn that could swing either way." —Greg Vincent
Ethanol takes a backseat
Although corn basis rose 4¢/bu. in early February, ethanol plants as a group were off 4¢, reports Kevin McNew, president of Cash Grain Bids. "Every state showed weaker basis levels for ethanol plants on average. It is clear that ethanol buyers are taking a backseat this year on corn demand." —Linda H. Smith
An alternate future
Admitting we are in our worst financial situation since 1930, perhaps it is time to face the fact that the world economy may not turn rosy again for quite some time.
"We have heard that the world is flat: We have free flows of capital and information, which has allowed rapid globalization to penetrate all corners of the world," says William Gamble of Emerging Market Strategies. But perhaps the world is no longer so flat: "As the economic tectonic plates go through one of their cyclical shifts, it appears there will be some mountain building."
Predictions for China's economy have fallen to 6.7% growth—well below the country's desired 8%. What if the economies of China and the rest of the world do not bounce back "like Silly Putty on steroids," as many commentators expect? "What happens if China no longer stays China?" Gamble asks. "China buys 23% of Korea's total exports and accounted for 28% of Korea's economic growth during 2003 through 2008," he says. "In December alone, Korea's exports to China fell 33% from a year earlier."
It is not just manufactured goods or just Korea, either, he adds. "Like a black hole, the Chinese economy has sucked in virtually every commodity—from Australian iron ore to Canadian lumber to Brazilian soybeans. Just about everything went to feed the ever-rapacious Chinese growth. It is just possible the outlook for commodities needs to be rethought." —Linda H. Smith
"Weak La NiÑa conditions are getting weaker and should be gone by spring." Jim Noel, Ohio State University meteorologist
"Have a plan, know your plan, trade your plan; Never outsource risk management." Jim Bower, Bower Trading
"The economy is in a crisis not seen since the Great Depression." Dave Obey (D-Wis.), chairman of the House Committee on Appropriations
"Protectionist threats have been increasing with every rise in the unemployment numbers." William Gamble, Emerging Market Strategies
"Oil supplies in the U.S., the world's largest consumer, are bursting at the seams." Phil Flynn, vice president, Alaron Futures and Options
Top Producer, March 2009