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December 2010 Archive for Marketing Strategy

RSS By: Scott Stewart, AgWeb.com

Marketing Strategy

Imagine corn exceeding your imagination

Dec 23, 2010

 

Back in 2006 when I wrote the $12 Corn Special Report, I sensed a global change occurring in our U.S. crop markets. We were moving into a global economy with worldwide buying interest in our commodities, rapidly increasing ethanol demand, and a financial structure indicating that elevators would quickly run out of margin money if prices turned bullish. It looked as if all we needed was a perfect storm of these factors coming together to vault commodity prices to record highs. As you know, we got it. Now here we are four years later. Do you see what’s happening?
 
The ethanol plants we killed—just as forecasted in the $12 Corn Special Report report—have come back strong and are burning through better than 4 billion bushels of corn a year. International use of ethanol is growing. According to the International Ethanol Report 2010, foreign countries are developing mandates requiring biofuel use.
 
The buy-and-hope commodity investors are back in the game, and China and others continue to buy our crops to feed their people. Once again, we are in a position where it looks like we could just flat out run out of key commodities, such as corn and soybeans. And just as I warned back in 2006, the elevators can run out of money, margin liquidation can cause massive market disruptions, and our commodity prices can go to new record highs. The record corn highs now will be beyond $8 for corn and much higher for other commodities.
 
When commodities rally, they typically stop at previous highs or blow through those highs, leaving them far behind. History has shown us that when commodities go to all-time highs, they usually reach 130 to 140 percent of their previous levels. That is on the conservative side. In extreme instances, commodities such as sugar, lumber, and others have gone up as much as 300 to 400 percent. Wheat did it just a few years ago. There are many factors that can drive prices to extremes. It could be something as simple as a weak U.S. dollar driving exports. Or it might be something as severe as a widespread drought (heat or lack of moisture). Back in the ‘70s and ‘80s, significant parts of the Corn Belt experienced droughty conditions about every 3 to 5 years. We were producing much more crop than we needed most years, and the occasional drought came along to wipe out the excess supplies and put the world back in balance. These days, the supply-demand balance is almost already out of balance, leaning towards almost no carryover supplies in major commodities. Should we have a widespread drought (remember – it can either be high heat or lack of moisture, or both), the bullish fuel this would add to the fire is almost beyond comprehension.
 
So what kind of prices can you expect to see in the next record bull move? Well, again, for a conservative number in corn, history tells us it will reach 130 to 140 percent of previous highs. Given our previous high of $8, the low side would be $10.40. More optimistic projections would forecast the $11.20 level for nearby futures. Remember, these are the conservative and low estimates. On the high side, history tells us that during extreme bull moves, prices can reach 300 to 400 percent of previous levels. That would indicate $24 to $32 corn!
 
Let’s look at soybeans and other commodities:
·         The previous high on beans was $16.63 in 2008 – 130 percent of that is $21.60 . . . 400 percent is $66.50.
·         The previous record high for Class III milk was $21.38 in 2007. A record rally could bring $30 to $32 milk on the conservative side, and 300 to 400 percent rallies would put prices into the $69 to $92 range.
·         The previous record high in crude oil was $145 per barrel. A 130- to 140- percent run past those levels is $188 to $203 – a 300- to 400-percent rally would equal $435 to $580 per barrel.
 
I have no doubt that these record high price levels are possible. The ramifications can be broad and extreme. We saw the beginnings and hints of this when corn, soybeans and wheat reached record highs. Fertilizer prices went sky high, land rents shot up, and land prices marched higher. All of the sudden, producers who had two or three years worth of crop prices locked in at what looked like very profitable levels were in shock over their red ink.
 
Just ask any dairy producer. Record profitability in the dairy industry for a number of years led to continually increasing production levels, and ultimately, massive price declines and red ink that most producers and their bankers never imagined could occur. Producers hurt the most were those who had locked in feed prices at high levels. There were dairies losing $1 for every $1 they brought through the door. In 2009, the milk price plunge wiped out many dairy operations.
 
I think it is very safe to say that future volatility will cause widespread pain and put many producers out of business. When that happens, it can open the door to unwanted company –for example, corporate America investing in, and taking control of, grain farming operations as we know them (see previous blog).
 
Continued, ever-greater volatility is the reason you should approach marketing with your eyes wide open to the possibilities. You have to imagine corn doing what’s hard to imagine—because the world will change, while economic themes repeat.
 
Don’t focus on the prices I’ve mention, and don’t become complacent with prices that look good in the moment. Rather, adapt your marketing to the point where you position yourself to maximize opportunity—within a reasonable risk parameter—as events that cause major volatility begin to unfold. Always take as much profit off the table as reasonably possible by doing your marketing well.
 
 
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2010 Stewart-Peterson Inc. All rights reserved.

Unwanted Company Coming?

Dec 16, 2010

 

Agriculture is hot. It no longer plays second fiddle in the business world. While other businesses struggle, agricultural commodities are in big demand. What will our industry’s popularity mean for you? Broadly speaking, independent producers will have to envision and prepare for a world that doesn’t seem possible.
 
It’s important to remember that success is magnetic. It attracts others looking to gain. For some time now, you have experienced the impact that funds have on commodities. How long will it be before corporate America decides its money is better invested in farm ground and farming than making widgets in a factory with high overhead?
 
For a closer look at what this all means, let’s look to the future. In the coming years, global demand for agricultural commodities could continue at a rate that leads to very attractive, even unprecedented, levels of profitability for agricultural producers. Corn prices of $5 and $6 are almost becoming common.
 
My expectation is that permanent market volatility—something we are in the midst of experiencing right now—will lead to higher opportunity and risk. Farm size will increase dramatically and the number of farmers will decrease dramatically. But the major earth-moving impact? Strong profitability leading to the very real potential for substantial infusions of outside capital into production agriculture.
 
The rest of the economy is struggling and is likely to continue struggling for years to come. Why wouldn’t corporate America acquire a ravenous appetite for agriculture? After all, if corporations can realize attractive shareholder returns by, for example, owning farmland, they aren’t likely to turn their backs on the investment.
 
Fast Forward
When corporations come knocking, bringing shareholder dollars to the door to buy agricultural land, many farmers will no longer be farming ground they own. Instead, they will be custom-farming for big corporations.
 
Think of the way a landscaping firm descends upon a community with lawnmowers, cuts grass and trims bushes, packs up the equipment, and drives back to its home base as the sun goes down. In the production agriculture version, you will own the machinery and provide the labor—you won’t control the land or your production. You’ll work on a margin for labor and a machinery investment, losing out on the opportunity to benefit from profitable prices brought on by volatility.
 
We could see producers forced to competitively bid for work, possibly online, in reverse auctions. In other words, your effort and machinery would be commoditized.
 
You’ll purchase equipment through large buying groups or corporations and have it delivered directly to the farm. The same goes for inputs. Financing will come through the same corporations that own the land.
 
What happens to your local banker, equipment dealer and other suppliers in this scenario? Without your direct participation in the local economy, they may well be gone. Consequently, they won't be there to donate for the construction of a new hospital wing, a new library, or renovation of your church. Your money will end up in the hands of multinational corporations, stockholders and foreign countries. Rural America as we know it could change dramatically.
 
The domino effect is not unlike what happened to George Bailey in the holiday classic “It’s a Wonderful Life.” You may recall that in the movie, George was given an opportunity to see the future and to take control of it, and he did so while he had the chance. Similarly, by maximizing profits and remaining competitive now, producers control the future of their farms and rural America.
 
Your challenge is to maximize profitability and financial strength. Take advantage of record prices when they come, and earn strong profits. This will be more important than ever, as volatility creates intense opportunity and risk. Producers who don’t position their operations for opportunity and risk will go out of business. When this occurs on a large scale, others will fill the void and reshape rural America.
 
Yes, this is an extreme scenario. However, when you think about the way success breeds legions of wannabes eager to grab onto coattails, it’s plausible to imagine others turning to agriculture to turn a profit and gain control. It has happened in chickens and hogs. Will crops be next? You have the ability to control your destiny.
 
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2010 Stewart-Peterson Inc. All rights reserved.
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