You might think it too simplistic to narrow price analysis and outlook to just one subset of data. But the KISS principle—keep it simple, stupid—has served me well in my tenure as a farmer, analyst and consultant over the past decades.
The hyperinflation of the 1970s left an indelible interest-rate mark on my mind. The unwinding of hyperinflation and resulting high interest rates led, in part, to the economic crisis in agriculture in the 1980s. President Ronald Reagan was credited with the demise of communism, which subsequently opened the world to a freer economy and growing global demand for food and fiber.
Price Response. Supply and demand principles dispel the myth that predicting price direction is impossible. Price discovery and managing price risk is alive and well via the Chicago Board of Trade and the Chicago Mercantile Exchange.
The basic tenet is where demand exceeds supply, prices rise, and where supply exceeds demand, prices fall. Before the 1980s, the government controlled supply. After the ’80s, ag responded to market prices.
Significant price moves are generated where the most significant supply imbalance is seen or perceived. Prices rise to ration supply, and they fall to find new demand. Grain prices rose in three major waves and contracted when supply exceeded economic demand. The droughts of 2011 and 2012 and price explosion incentivized global expansion of arable land.
In 2011/12, sold grain turned into disposable cash and, in turn, into land and depreciable assets. Non-ag asset values have increased markedly. Depreciable assets are worth perhaps 50% of what they cost.
A popular philosophy is “You can’t win or lose if you don’t play the game.” I can’t sell $6 corn again if I don’t control the land used to produce it. The danger lies in wearing out machinery and spending precious heartbeats waiting for that day. Time can take its toll.
The Next Cycle. We know what a buy low and sell high scenario means, but the opposite scenario, to sell high and buy low, works just as well. Ag commodities are showing a glaring disparity compared to the NASDAQ and other stock indices. I can see a scenario of a new paradigm shift in the global economic outlook. Yet I wake up some nights pondering if selling high and buying low will be in vogue soon.
Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. For information, call (707) 365-0601. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades.