Market Outlook

March 30, 2016 02:39 AM
 
Market Outlook

By Sara Schafer

Row-Crop Profits Predicted to Stabilize

Negative net income is projected for the third straight year for row-crop producers. Yet relief could be ahead, according to a recent Rabobank report. 

“When you balance long-term supply and demand, we’re getting to the point where we’ll see price equilibrium,” says Ken Zuckerberg, Rabobank senior analyst for farm inputs. “Our opinion is that we’re moving more toward break-even levels over the next five years.”

For corn, that means prices between $3.60 and $4.20, while soybean prices will average $8.30 to $9.60. Farmers will need to add efficiency and optimize input costs for yield improvements.

“Row-crop farming is a commodity business where the product is largely undifferentiated,” Zuckerberg says. “The only way to win is to build scale and be the low-cost operation. We believe this will bring on yet another wave of consolidation.” This could spell growth opportunities for well-positioned farmers. “You want to be liquid and agile when the crowd is running the other way,” he says. 

Other implications of this crop-price stabilization period, according to Rabobank, include:

  • Large crop farms will need to conserve working capital and have alternative sources of cash.
  • Farm input providers will need to deliver more value to cost-conscious growers, perhaps in the form of solutions that are integrated or bundled.
  • Although the U.S. farming industry has been consolidating for decades, the nature of the expected recovery will benefit larger-scale farming systems over medium and smaller farms. Smaller farms could be forced to pursue strategic mergers or vertical integration strategies to improve profitability. 

Zuckerberg says the call to action is clear: It’s time to readjust for the future.

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After farm income declines from a peak, farmers generally take steps to downsize and prepare for a price basement by trimming machinery investments and inputs, Rabobank says. The next phase producers take is to optimize crop yields with available resources. 

Policy Update with Mike Adams

Fading Cuba Embargo Marks the End of a Failed 50-Year Policy

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History tells us there are very few, if any, winners in trade embargoes, and the U.S. embargo on Cuba is another example. We are witnessing the unofficial ending of a failed policy. From approval of commercial flights, to a presidential visit to approval for a U.S. company to do business in Cuba, the embargo is coming apart piece by piece. 

The remaining piece will be financing and credit. Cuba’s credit history is not great, but relaxing restrictions should make it easier for them to make payments. Tourism alone will increase the need for goods and services as well as create income. Cuba imports 80% of its food, and the U.S. ranks only fourth in ag exports to the island nation. The embargo has made a bad situation worse for the Cuban people and has deprived U.S. producers of a market.  

I’ve been to Cuba twice, and I returned both times feeling we could have brought about positive changes there by doing more—not less—business with them. We might not like their politics, but that doesn’t stop us from doing business with several other countries we disagree with. It has taken more than 50 years, but the embargo is finally coming to an end. It’s better late than never. 

Hear “AgriTalk” each weekday at 10:06 a.m. CST on the MyFarmRadio app or at agritalk.com


By Nate Birt

Ask an Analyst: Scott Harms, Archer Financial Services

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    scott.harms@archerfinancials.com

What is your commodity marketing philosophy?
We look at markets based on fundamental value over a 45- to 60-day window. We review them weekly or biweekly, reach out to several sources and come up with expected trading ranges. That allows us to remove the emotion out of day-to-day price swings. 

What distinguishes your consulting firm from others?
Our forte is working with producers, helping them identify pricing targets and setting expected ranges. They can either follow their own strategies or enroll in one of our management programs. We encourage customers to have a written plan and sales targets. 

What’s one action producers should take to manage commodity marketing risk? 
During these quiet times, set your price objectives above the market. There’s bearish information in the market, but there’s always something to trigger a strong short-covering rally. If your price objective is to sell corn at $4.25, somewhere along the way advisory services will be raising their targets. To get there, there has to be a problem, likely weather. As you get closer, people will start talking about $4.50 and $4.75 corn. If you don’t have a plan, you’re more likely to pull those offers. Timeframes need to be identified. Have a plan but also scale into hedges. We use an inverted pyramid to sell more at higher levels. Use options on first targets and futures on higher ones.

Which marketing tool is most underappreciated?
Short-dated options have been valuable tools during the past three years. Set your own timeframe to market grain in the first half of the year but hold out for higher prices. 

In terms of industry experts, whose business advice do you respect greatly? Why?
I’ve been fortunate to work with Mickey Luth, a solid fundamental analyst. From a technical perspective, I follow Dan Zwicker and the Hightower Report. 

What activities do you enjoy? 
I monitor the weather for how it affects grain and golf conditions. You can also find me at Wrigley Field in Chicago.
 

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