Jerry Gulke: Are We Witnessing A Resetting of Agriculture?

14:00PM Feb 25, 2019
Are We Witnessing A Resetting of Agriculture_2-25-19

The ag world changed in the past 10 months, says Jerry Gulke. "There have been no text books written yet to deal with this resetting of agriculture. "( Sara Schafer )

The catch-up USDA info released in February gave us little to shout about. Yields were reduced for corn and soybeans. But corn demand was also reduced with a 125-million-bushel reduction in feed and residual use and a 25-million-bushel reduction in ethanol. This, in turn, offset most of the 200-million-bushel reduction in production. 

With carryover stocks this year much like last year, and with likely more of the same next year, prices look to be confined to resistance levels that are represented in the weekly corn chart below. 

Bull markets historically tend to retrace all or most of their gains. It might be a matter of gravity, as prices more easily fall than rise, but I suspect it is pure supply and demand at work in a semi-free trade market that incentivizes production. Given the bullish fundamentals that began 12 years ago, perhaps ag commodities were due for a “reset.” For example:

  • Corn retraced 100% of its price appreciation since the ethanol mandate by former President George W. Bush.
  • Soybeans retraced 100% of the gain since 2007, resetting back to $9, a level economically unsustainable in the current variable and fixed-cost regime. Pending final tariff deal, it appears China and the U.S. will now share the global glut of beans, becoming partners thus tempering prices with each holding sufficient stocks of around 500 million bushels. 
  • Wheat has also succumbed to supply-and-demand changes. After reaching $12 in 2007, Chicago wheat lost all its gains. Minneapolis wheat (the premium wheat) reached $24 in 2007, and it is now $6.

In the meantime, increasing yields offset the lack of price appreciation, as farm sizes exploded. If a reasonable standard of living can be maintained with a normal acreage (whatever normal was in 2007) the excess acreage is on the margin and requires more and more land to support bigger and bigger equipment. Or is it the other way around? An inflection point, where a small loss in a large amount of acres can bring down or eliminate the profitability of the base acreage, is at risk. 

Where Now? The ag world changed in the past 10 months, supposedly to benefit non-ag sectors. Grain flow and its distorted logistics has changed trade materially. There have been no text books written yet to deal with this resetting of agriculture. 

Those of us who have been around since the late 1970s and 1980s have navigated the trouble waters created by our former presidents. We’ve seen everything from Nixon’s embargo of beans to Japan, Carter’s embargo, Reagan’s worst ag recession in modern times and today’s total upheaval caused by President Donald Trump in the name of fair trade. 

The far-reaching effects of what we in ag have seen in the past 10 months—the importance of the results of U.S. and China tariff negotiations and the influence on our financial health—cannot be underestimated or ignored. A long time ago my parents, who were children of the Great Depression, said, “expect the best, but prepare for the worst.” That advice still holds true today.  

 

Read more analysis from Gulke and listen to audio commentary at AgWeb.com/Gulke

Jerry Gulke farms in Illinois and has interests in North Dakota. He is president of Gulke Group Inc., a market advisory firm. Contact him at (707) 365-0601 or GulkeGroup.com. 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.