2009: The Year of Transition
By Jerry Gulke
Financial retractions are often led by commodities topping first, as was the case last summer. Some believe that commodities also may bottom before there is concrete evidence of a general economic turnaround. Will we find this summer that the worst of the worst occurred in the fourth quarter of 2008 or first quarter 2009, before the stimulus programs had time to have a material effect, setting the stage for overstimulus and inflation?
Unknowns. As the growing season gets under way, planted acres will be a moving target until June. Until then, we will live with last month's survey response. Weather will play a very important role this year.
Interest abounds as to how high-priced inputs will affect crop choices. The lukewarm February price average for crop revenue insurance gave no clear-cut acreage winner. However, conventional wisdom suggests more corn reduction this year.
A theory about major personal life-altering events (death of a family member, divorce, loss of job, etc.) suggests that after a 12- to 18-month period of adjustment, we tend to return to the lifestyle or habits that were in place before the event occurred. Agriculture went through just such an event during the year, as we shifted from looking forward to the best of times economically to witnessing the worst global economic despair in our lifetime. If there was ever a time to test the period-of-adjustment theory, this is it!
Informa's initial estimates last month suggested that the theory may indeed be true, with corn and soybean planted acres both at 81.5 million. Perhaps this is no accident. It may be in this year of transition that we revert to the traditional 50-50 corn/soybean rotation.
Prior to the explosion of world economies and energy prices and the speculation it brought, the comfortable position for ag was one of crop rotation. Planting and harvesting time constraints, as well as labor, weather, machinery and capital investment, were all smoothed out, with risk aversion a priority. With a farm program safety net of sorts in place and the cradle-to-grave crop insurance schemes not yet emerged, managing risk agronomically was more of a focus.
Chart tales. The chart above signals some interesting developments. The momentum indicator I used is long (indicated by L), suggesting the markets may already be looking ahead to 2010/11, when we may need 91 million corn acres again.
Momentum failed to go short irrespective of some of the most negative global economic news one could imagine—including Federal Reserve action to monetize debt, sending the U.S. dollar into a collapse and raising fears of inflation in 12 to 18 months. Perhaps this is the early signal of a turnaround I mentioned at the start of this column.
Should we close into new highs for the year, it would suggest that the market has discounted all the negative information in the first quarter and is looking well beyond 2009.
For now, I will view a close below any previous month's low, or a close below a previous week's low during any week of a USDA report, negatively and as the first indicator to hedge aggressively with options/futures or cash sales. I still view $5.25 in any December 2009–July 2010 futures contract as overpriced if crude is under $60/barrel and if the U.S. dollar is trading above last month's highs. Under current global economic conditions, there is little that can be done with $5 cash corn. No one wants to feed it, burn it or import it.
Jerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact Jerry at email@example.com or (312) 896-2080.
Top Producer, Spring 2009