Sep 15, 2014
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The Hueber Report

RSS By: Dan Hueber

The Hueber Report is a grain marketing advisory service and brokerage firm that places the highest importance on risk management and profitable farming.

A Look Forward Part IV

Aug 15, 2014


So, moving forward, what does this potentially mean for all of us in the production sector?  First and foremost, if I am correct in my assessment that we have already witnessed a 30-year peak in commodity prices, we must now work through a period of re-adjustment at the farm level.  By no means do I think it is realistic to believe prices will revert to the level we experienced through the 1970’s continuing through to the new century, but we should be in the process of adjusting to our new plateau.  Using corn again as the example, through the 1920’s into the post WW II peak, prices generally traded between $.50 cents and $1.20.  From the 1950’s into the early 1970’s corn remained between $1.00 and $2.00.  The 1970’s through the end of the century, we were contained between $2.00 and $4.00 and of course now we have expanded to $8.00 on the upper end.  Does this mean that we can now expect to see corn remain roughly between $4.00 and $8.00 per bushel, or possibly $8.50 and $3.50 for the next 20 to 30 years?  While this is still the discovery period, the upper end should be fairly established but we have yet to determine the lower side.  That said, we should learn what this range should be between now and the fall of 2014.  Historically, the low end of the range is normally established during the second year after a major peak. The more optimistic outlook for the economic picture would call for a period similar to the 70’s to 90’s, where prices traded regularly between the upper and lower ends of the trading range.  But what if this new era is similar to the 50’s and 60’s?   Low volatility, narrow ranges, and stagnant returns for production agriculture are possibilities that could be very real and disastrous. 

As covered previously, input costs and expenditures on machinery and equipment have accelerated sharply over the past five years.  Along with readjustments in those sorts of purchases, if, as I believe, prices begin to stagnant at this new range there will need to be major readjustments, particularly in the area of cash rents and land prices which are exhibiting many of the classic signs of a bubble.  About this—in six of the past seven years, agricultural ground in the heart of the Corn Belt has risen at a double-digit rate.  In some regions over the past few years, ground prices gained as much as 26%! [i] 

I believe the essentials you need in your toolbox moving forward are the following:

1.     A sharp pencil

a.     You need to know exactly where you are and recognize areas where waste or inefficiencies can be eliminated.

2.     Education

a.     Brush up on your risk management education.  If you have not been using your skills, all tend to become a bit rusty and out of shape.  It is time to bring these skills back to top performance levels.

3.     Use all the tools at your disposal

a.     Cash contracts

b.     Futures and Options

c.     Revenue Insurance

d.     OTC Products

There are a variety of tools that are available that can help you address risk and manage return.  There is not "one size fits all", so you need to learn how to use the right ones for the right job.

4.     Discipline

a.     This really applies to all aspects of your operation.  It applies not only to the discipline needed to develop a well thought out written risk management/marketing plans, but just as important the discipline to implement such plans.

5.     Strengthen your relationship with your lender

a.     Many of us have needed to rely less on lenders over the past couple of years, and it may be time to re-develop that relationship.  Keep in perspective as well that someone under the age of 35 has never really experienced a rough period in agriculture.  You need to be prepared for how your lender could react. 

6.     Set realistic i.e. toned down expectations

a.     We have grown accustomed to very substantial returns on investment in production agriculture, which is not historically the norm.  How long to you think it would be realistic to see double-digit returns with a zero percent interest rate environment?

b.     Additionally, up-cycles such as we have experienced over the past decade or so are very forgiving to less than disciplined risk managers.  Down cycles are very unforgiving

We at the Hueber Report specialize in providing you with the very tools you need to thrive in all periods of the Agricultural Cycle, especially when times become challenging as it appears they will over the coming years.  We consider it a privilege to work with the American Farmer, to help them manage risk, and to prosper through a disciplined approach to marketing.  Whether we are feeding a world population of 8 billion or 10 billion by the end of the century, farming is literally the industry that can mean life or death for the world.  We strive to do all that is within our power to help clients carry out this task profitably.

When you concentrate on agriculture and industry and are frugal in expenditures, Heaven cannot impoverish your state.

Xun Zi

[i] The Agricultural Newsletter of the Federal Reserve Bank of Chicago.  Number 1961. August 2013.

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