Market Strategy

December 3, 2008 12:48 AM

Topsy-turvy Markets

A paradigm shift in thinking seems to be emerging—from rationing demand to one of deflation, with deleveraging and capital preservation the focus. The 2008 price volatility and profound changes in global economic activity promise to affect what and how we consume—in food, fiber and energy—as well as the very social and economic structure we have come to value. Witness the election last month, with its theme of change.

World buyer woes. The economies of the world are in trouble, and if we wondered whether other countries were decoupling from the U.S., the answer is a resounding no! All around the world, countries are feeling financial pain. The emerging countries account for the lion's share of increased demand for food, fiber and energy, and they are ill-equipped to handle economic adversity, threatening to exacerbate a deteriorating world situation.

VeraSun's bankruptcy questions the viability of the ethanol industry as a trusted buyer. The potential ripple effect on producers and others who sell to bankrupt entities has not yet been quantified.

It makes the use of expensive hedging look cheap, enabling us to maintain beneficial interest until we decide to deliver rather than commit to sales to a bankrupt buyer or a commercial firm with huge basis.

I have long supported a new line item in our cost budget to manage risk. Which is better: to have paid 50¢ for a corn option, or to find yourself in a bankruptcy pool of creditors and being told by some judge what you will or will not do?

Energy. The collapse in energy is a bright spot, putting more money into consumers' hands and theoretically lowering the cost of our inputs.

Natural gas has been a casualty of reduced demand. However, even though it accounts for as much as 90% of the cash cost of ammonia, NH3 prices have not fallen proportionately at the farm gate yet. Your suppliers may be long this market with no protection. Be careful from whom you buy.

What to do? The corn and soybean price charts reveal long-term trends changed six months ago. Top Producer readers will recall that long-term trends can last 18 to 24 months. That would be consistent with allowing market forces or governments time to reverse world economies, if things don't get worse.

The air is full of uncertainty, with the focus on deleveraging (deflation), with its depth and length yet to be determined. In a business where we can convert depleting assets (grains) into cash (capital) as quickly as a phone call if need be, I ask myself whether I would buy or rent more land or purchase more equipment based on today's cash flow. Do I want to bet that higher prices have to occur just because people have to eat? Do I think prices will earn the huge carry reflected in late 2009 futures? I think not!

Collapsing grain prices and still-high-priced inputs will keep speculation alive about what and how much we will plant next year. Our product is a renewable resource. It may take a real weather-induced production destruction to return prices to levels of just four months ago. I will continue to view rallies of 7% to 10% in 2009 prices as a gift until global outlook once again suggests concerns for rationing demand. I will focus on capturing the huge carry offered for corn and wheat from December 2008 to December 2009 through on-farm storage, while looking weekly for a technical reason for reownership.

As witnessed all year long, this is not a time to set and forget. Due diligence is needed. Let's hope we are not talking about the same problems a year from now at the end of another harvest.

Jerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact Jerry at or (312) 896-2080.

Top Producer, December 2008

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