I don’t tend to sugarcoat my opinion about the markets. As a result, I have gained the reputation of being a bear. However, my primary objective is to help readers merchandise their grain, rather than make them bullish (speculative), so I proudly wear the title of Mr. Bear.
Since 2008, the grain markets have experienced some of the wildest price moves since the early 1970s. It’s getting increasingly harder to figure out the markets because not only do we have the annual changes in supply due to crop mix and weather, but we now have the influence of ever-changing domestic and global demand.
A look ahead. There are two opposite opinions floating around about the health of the U.S. economy. The first opinion, shared by the current administration, mainstream economists, Wall Street and most business owners, is that we are merely in the bearish portion of a normal business cycle. Now that the war is winding down, we need to turn our attention to U.S. economic issues. With enough fiscal and monetary stimulation and the rich paying their fair share of taxes, the economy will quickly move back to its hay days. All we need is to have faith in the politicians, spend like we mean it and be patient!
The opposite opinion suggests the game is almost over. After decades of living beyond our means, the bank account is empty and the bill is due! While there is some difference over how long it is going to take, in general there is a common agreement that dark economic times are ahead for the bulls. This type of doomsday discussion is not new, but people are starting to notice that the economy is not bouncing back like it has in the past. Equity in housing and retirement plans is dropping, the cost of living is going up and Washington seems clueless as to how to fix it.
People who are much smarter than me are trying to figure out which opinion is correct. All I can tell you is, the years ahead will be violent—which makes concentrating on the bottom line more important than ever.
While we hope the bullish perspective is correct, what if the bearish side of the equation has merit? Would it not be prudent to lay off some risk, just in case? It might be a good idea
to explore the following strategies for the next three to five years:
- Real estate, especially houses, second homes and commercial property, could come under extensive price pressure. If you’re not attached to the property, consider using any price bounce to move excess leverage assets as we move into the 2012 presidential elections.
- If borrowing at short-term variable rates, look into getting interest locked up at fixed rates. If that’s not possible, consider selling 10-year or longer notes as a cross-hedge to long-term interest rate exposure.
- Next comes the hard one: buying farmland. For several years, I’ve said farmers should buy land; I now believe we are getting closer to a top in the land market. It might be two to three years off, but it is coming. So unless it’s a total cash purchase, don’t buy land much past 2012.
Is there any way to take advantage of this possible bearish environment? Yes, by aggressively selling stocks on rallies; now is the time to be liquid and focus on cash accumulation.
I believe politicians will tolerate inflation before they accept deflation. The longer they can postpone the problem, the more it will be somebody else’s problem. As a result, I like the buying gold, selling bonds and dollars route for the next few years.
10 = Excellent sales opportunity
1 = Excellent buying opportunity
As you move into 2012 and think about the supply-and-demand structure of agriculture, don’t forget these two opinions have completely different outcomes. It’s crucial that a market plan has enough flexibility to respond to economic events as they unfold.
Spreads are narrowing, basis is red hot and corn harvest is barely 60% done as I write this column. It is obvious end users want corn now. Pro-ducers, on the other hand, are saying
if the market is this strong now, let’s wait until spring when weather becomes an issue. If the rumors are right, producers are storing their corn and holding onto it until next year.
Now that $7 cash corn is quickly becoming a reality, move the grain. To re-own for a June-to-August weather scare bounce, use the cash-flow movement of January to March to re-own in a limited risk strategy.
In regard to expected 2012 inventory, if all inputs have been purchased and the current $6 corn price allows for $200 to $250 in profit above all costs, start selling enough expected inventory to cover input costs.
- Mid-November 2011