Market Strategy: Looking Back At 2015

November 25, 2015 02:41 AM
 
Harvest29

This year’s pre- and post-harvest price action has been quite different from 2014. It was different for the market to concede, in the fall of last year, that prices could rally during harvest, especially against a backdrop of record yields. Yet they did so with a vengeance, rallying through October into the end of harvest and then into January 2015. 

From Oct. 1, 2014 to the end of December 2014, corn rallied more than 70¢ only to post a massive daily key reversal on the first trading day of 2015, putting an end to the rally. December 2015 corn topped at $4.40 that day and was eclipsed for only one week in July 2015 on a summer weather rally. Soybeans actually rallied through harvest 2014 right into 2015, not looking back until they also posted a top in July. 

Being flexible with hedges and using buy-sell signals to lift and replace hedges selectively helped make our 2015 crop year a profitable one. 

Sideways Market Fades. Yet the expectation of a post-harvest rally this year left many watching and waiting to no avail. It was an elevator’s dream to hedge off grains as basis narrowed. The same was true for those with on-farm storage. For others, though, the year has been nothing like last year. 

This year, prices for corn and soybeans actually peaked by mid-October after an early harvest low in early to mid-September. Prices have deteriorated ever since. 

My extensive tours of the Midwest and northern Plains prompted me to give 70% odds that our national yields could approach last year’s records. My concern was that November’s Supply and Demand report from USDA could reveal my worst fears—and it did. 

Corn yield rose, and production grew 100 million bushels. Demand fell 100 million bushels, translating into a 200-million-bushel increase in ending stocks. Our exports could suffer further deterioration: Argentina corn is reportedly 35¢ less than corn railed in from the western Corn Belt. 

Soybeans saw yield and production increases with improved demand. Still, ending stocks rose by 
45 million bushels to 465 million bushels. Competition has expanded as Argentina awaits an export tax nullification on 750 million bushels. 

Wheat carryover rose 50 million bushels to 911 million bushels, the second highest in 13 years, partially a result of strong U.S. currency. 

Trim Production Costs. Without a weather-induced production shortfall by a major exporter, a 4 in front of corn prices and a 10 in front of soybeans could be a figment of our imagination. 

Some land-grant universities have suggested a 40% cut in land rents is needed in the main corn-growing areas. Reduction in fertilizer usage and prices will help. Using non-GMO seeds, especially corn, would cut costs $40 per acre.

Yet the capital needed to make a loan payment requires after-tax income. Already, some farmers are discussing whether to refinance equity in land to fund short-term working capital. 

Profit And Loss. This is not my first rodeo, and the potential malaise in the ag sector was not unexpected. Profit will have to be earned the old-fashioned way. Yet cutting input costs will just enable maximum land to be planted again. 

Absent a production reduction rationale (which I outlined in my November column), I am reminded of a statement from my old MBA graduate school days that dictates, “In times of intense competition, price will revert to the marginal cost of the least efficient producer.” It implies someone will have to go out of business, and some land somewhere will be idled. It’s been 30 years since the 1980s, enough time for a lot of “new” agriculture to get an education.

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