Great Opportunities Ahead!
Oct 08, 2008
I’ve been out of the office for a couple of days due to a death in the family. I have to say the funeral was more pleasant to participate in that the markets. Most market players are looking for a neutral to positive USDA Supply/Demand report in regards to supply but the big question will be demand expectation. Right now everybody is on pins and needles as to where we are heading, a major global economic melt down or simply recession!
This uncertainty is causing everybody to become cautious which in itself helps increase the potential of bad times ahead. Right now we need some bold action by our government officials but we seem to be heading the other way. We have a lame duck president that nobody has confidence in and a Congress that wants to “do nothing” because they want to blame the Republicans for all the country's woes. Just think starting in January we have the potential for the Democrats to have the majority vote from the President down to U.S. House and Senate. I wonder what they are going to do. Increase taxes on the wealth and start massive government programs to stimulate the economy? It may work for a short time but my bias is until we build future growth on solid demand and supply fundamentals rather than printing money, you are not really going to get things to turn around as much as we all would like.
So what should you do? Frankly, I’ve not handled this year well. As a bear I got beaten down in the first half of the year. Yes, I sold some inventory but not near enough. I remember telling some clients back in May and June that this rally could not continue. Frankly, I thought everything above $6 corn and $12 beans was too much and the big correction would occur by 2010. I misjudged the overall strength of the economy and completely missed the banking system melt down. This goes to show us how much outside markets really influence the ag commodities.
That’s now in the past—what should one do now? First, fight the fear or flight strategy to do all or nothing approach. I would suggest you make small decisions rather than one big one. If you have not sold inventory by now I would have to suggest storing corn first and beans second. As the market breaks and basis improves focus on locking up basis for the time period you are going into. Third, rather than hold inventory unpriced into the spring and face all the flat price risk and storage cost I’m encouraging producers to sell out of money calls at the strike price they want to sell inventory. The objective would be to at least pay for all the storage cost and have a specific price objective where you would actually move inventory.
Second, in regards to off-farm assets like 401K accounts, there is still time to adjust. I would move “only” a portion into strictly cash accounts. I see nothing wrong in being conservative. I would suggest moving back into bed rock blue chip stocks when we get a solid technical buy signal in the S/P say a close back above the 18-day moving average. This is what I’ve done in my account. I diversified my holdings so I can sleep at night, again it’s the strategy of several small decisions rather than all or nothing approach.
Third, should I be buying land or building cash reserves? This is always a problem for farmers. It seems land only comes up for sales when it’s the most difficult to buy it. So the answer really is simple. If you are planning on being in farming for more than 10 years or have sons coming up in farming, controlling the land is going to be key to your long term financial survival. Therefore, I believe you have to keep your money in land rather than cash or equities. I must however suggest regardless of how bad you want the land now is not the time to get your operation “top heavy” in regards to debt. Borrowing much above 30% of equity may be dangerous for the next couple of years. This means I would encourage you to look around for investors. They are hiding but they really do want to invest their money in something more solid like land.
Is the super commodity bull cycle over or is this simple a hard correction? On the surface it looks like its dead for at least a year! I would be quick to point out we still have all the future buying demand for China and India which is where the world’s population growth is going to continue. I would like to paraphrase the late Earl Butz, who once suggested you may have people who need our product but unless they have money there is no real demand. This is the issue at hand how long will it take before consumers have confidence to spend domestically and internationally? My bias is the quickest would be second quarter of 2009. So my answer is the super bull cycle has only been put on hold, great opportunities are ahead!
So when should feed buyers or people who have sold their inventory and want to reown get long? The bias is to be long immediately because the market has moved lower than we all thought possible. My suggestion is to fight the desire to try to buy the bottom. If you are going to try you need to be buying calls or long futures with very tight stops or long puts to defend. The theme is don’t over play your hand; keep your losses small in searching for a bottom. The conservative way would be to wait for a bottom formation hopefully in the form of a distribution bottom and then buy on strength. Buy a break out of overhead resistance or a break above a long-term moving average. The implication is you are not fighting the trend, instead you are moving in unison. I don’t know how fast this will develop all I know is it is the pattern I want to see before pressing the long side of the market. At this time patience is a virtue rather than a curse!
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