Current Marketing Thoughts
Kevin Van Trump has over 20 years of experience in the grain and livestock industry.
What Is the "Reality" in the Grain Markets?
Dec 07, 2011
It is starting to be extremely tough to discern if US money managers are more afraid of missing a "year-end rally" than understanding what NO Eurozone means for the world economies.
Obviously all eyes will be on the EU Summit meetings this Thursday and Friday. Hopes are that EU policy makers are finally looking to create some type of a "fiscal union" that would allow the ECB to become the primary lender of last resort. The thoughts of a "Eurobond" or "fiscal union" coming out of this meeting are inspiring, but I truly doubt a reality. I would suspect on a much weaker note we will hear news indicating that the IMF will lend to Italy, using funds, from the the ECB, EFSF, and who ever else is willing to throw money into the hat. Several analyst are thinking the total amount could be close to 500 billion euros. This certainly is a big number, and something of this magnitude would excite the market (at least initially), or at least until someone smarter than the average bear asks how this solves the core structural problem of being in debt and NOT being able to pay down the balance.
There are now reports circulating that several key "US Senators," all from the Banking Committee will be meeting today with the IMF's Christine Lagarde to discuss the details of the Eurozone debt crisis. I have no idea why we would be sending in the "hired guns" if there weren't some type of backdoor bailout underway, that includes good old Uncle Sam's printing press of dreams. In a press conference they said, "We will be trying to 'thread-the-needle' between drastic budget cuts, and backstops that could prevent any panic from people making irrational decisions." I love the part about "people making irrational decision." Call me crazy, but aren't the guys saying this the same people that have the so called 'magical-money-tree' in their backyard? An "irrational decision" is continue to give countries huge bailouts when they can not even begin to pay back their original loans. My coach always told me the definition of "insanity" was doing the same thing over and over while expecting different results! I think we know who is insane here... From where I sit, it looks like the game plan is to save the banks and "banksters," give them enough money so they can save the sovereign debt, and to hell with the real economy and or any real semblance of a "valued" currency.
The problem I continually have, and the one I need to constantly remind myself of is that we no longer live in a "real" economy, so I guess the "fantasy" bailout plan should work like a champ. In a world where currency has no "real" value and economic numbers are twisted and turned and the books are cooked I think it should be perfect. Don't forget in fantasyland we have become a total "self-funding" mechanism as the Fed prints and prints and keeps banks and governments fat and happy. The only thing we need now are some toy soldiers and tanks to keep the sheep quiet. I could obviously go on and on about these ridiculous plans, and how trying to avoid mistakes and problems, in the end only makes the matter worse. If we had any vision at all we would be buying Disney stock right now because they are the originators of making Fairy Tales come true... Maybe clicking our heels three times is the answer (I should have told them that sooner).
On a realistic note, and from a "Macro" prospective it is getting very difficult to argue against weaker global economic data, continued long-term risk in Europe, and signs of decreasing physical demand in the Asian commodities. This exact thought process is promoting many large investors to bust out of their long commodity plays and look for alternatives. If there continues to be more evidence of these concerns revealed in the days or weeks ahead, I would anticipate more commodity length could be liquidated and taken off the board. I was hoping the "liquidation phase" had just about ran its course, but unless something drastic changes, all I can see are short-term rallies followed by more selling pressure.
I know nobody wants to hear it, or wants to listen to bearish news, but my job is to make you aware of inherent risk as they develop. I am telling you now, this slowdown in China is nothing to scoff at. Do you realize their benchmark equity index has now fallen to its lowest level in six weeks, on more concerns regarding a real-estate bubble and a slowdown in Europe. Several analyst are now thinking that a significant correction in their real-estate market or additional slowdowns in Europe will lead to poor loan portfolios and pose a big threat to economic growth next year. The bottom-line is if the European debt crisis gets worse, I would suspect so called "hot-money" will probably continue to flow OUT of China! Keep in mind the Shanghai has fallen by about 17% this year, that's on top of last year's losses of about 15%. Sure one could argue that a move by the central bank to lower required reserves for banks for the first time since 2008 will eventually turn things back around, but as of right now their stock market hasn't seemed too excited about the news. I would suspect we will see even more reductions in the weeks ahead by the Chinese government. As for their "real-estate" bubble, I don't even want to touch that subject. From what I am told, the Chinese banks’ exposure to their property market is grossly understated. We all sadly know how this story ends, let's just hope they can kick that can further down the road before the bubble burst. In any regards, we need to keep a close eye on the slowdown taking place in China.
As for the grain and soy markets, weather in South America seems to be of the most importance. There continues to be extensive talk about dryness in Argentina and the potential for a significant setback. I personally think it is still a little early to be jumping on that bandwagon. It is my opinion that Brazil's weather is most important right now, especially for corn. With Argentina's crop a good month or two behind Brazil's they still have plenty of time to see improved conditions. All you need to do is look back at last year when there was extensive talk early about poor conditions in Argentina, only to have things improve dramatically as the rains came late.
Here at home traders are gearing up for this Friday's USDA report. Most of the guys seem to be thinking we will see a cut in US corn exports, feed usage will be left unchanged, and ethanol numbers being heavily debated in both directions (my guess is they leave them unchanged or give them a slight bump). I am not in the camp that they will be lowered. As for soybeans, you have to imagine we see a 25-50 million bushel cut in US exports. There is also some talk that domestic usage may fall slightly as well. In summary, this means that many traders are thinking both corn and soybean stocks may get larger on Friday. If we see any extremely bullish numbers the market may get caught leaning over the wrong side of the boat. I would simply advise keeping your exposure limited and looking to sell any major rallies.
One of my good clients sent me in a quick and easy to read budget for his corn production next year. I have had a lot of guys asking where most are coming in so I thought I would include the numbers. The range of budgets I have seen are coming in somewhere between $700 per acre on the low end and $950 on the high end. Obviously based on your yield per acre, cash rents and miscellaneous expenses, most guys are looking at a break even for corn next year between $4.75 and $5.50.
I am afraid many guys are finding themselves very close to break even or possibly already in the red for soybeans, especially if you factor in the basis. From what I am hearing many producers are looking at a break-even somewhere between $10.50 and $11.20. If your a producer, with prices getting dangerously close to break-evens, I don't see much incentive in chasing more "crop production" right now. Instead of buying more land or renting more acres, I like the idea of buying more storage, and giving yourself more marketing options. This can help eliminate the marketing forcing your hand to sell during the extreme down-cycles. More seasoned marketers may find these waters best for liquidating the cash bushels and making the necessary adjustments on the board, which I also like in today's market place. Anytime you can take advantage of an improved basis and reduce your overall risk exposure, I find it to be a true "win-win."
If you don't have a hedging account or an advisor that can help you with these strategies, I seriously urge you to consider finding one. I am not saying it is a necessity, but as the markets become more extreme, there are certainly situations and strategies you could be implementing to improve your overall results and reduce your overall risk. As big money pours into Agriculture, they unfortunately bring along some of their rules of warfare. One of their biggest and most famous rule is "Adapt or Die." If you think you are going to continue to market the same way you have in the past, while big money pushes prices to extremes in both directions, you may need to do some serious self-evaluation. The rules of the game have changed, the touch football game you were playing in the back yard with your friends has turned into a tackle football game with billions of dollars at stake. Make sure you're playing by the same set of rules as the rest of the players, and have all the new helmets, safety gear and training to play at this new break-neck speed. You will need to bring your "A" game if you are going to grow in this highly competitive marketplace.
Quick Corn Budget (per acre expenses)
|Trucking 15cent by 200 bu
|Drying/Storage 20cents by 200
Total Per Acre: $910 Divided that number by 180 bushel production estimate and it equals a $5.05 break even. *Lower the yield down to 150bpa and you are looking at a $6.05 break-even.
Remember, this is only a small portion of my Daily Report that comes out every morning. For more information on your profitability and cost per acre, go ahead an sign-up for the 30 Day trial of my report. There's no obligation! Simply sign-up by clicking here at the Van Trump Report