Outlook: Burden is on the Bull

December 5, 2015 02:00 AM
Outlook: Burden is on the Bull

About this time of year, we turn our attention to the grain in the bins, unpriced contracts that have been made and exactly how much risk to take. Many psychologists say it’s a bad idea to make New Year’s resolutions we can’t live with, but I like to start the year with a fresh attitude—I’m an eternal optimist. It’s important to learn from the mistakes and successes of the previous year and then move forward. Each year has its own unique challenges. 

How do you break undesirable marketing habits? You must have a firm understanding of the fundamentals as they exist, not what you want them to be. 

Ask yourself a hard question: Do you feel the fundamentals for corn, soybeans, wheat, hogs and cattle favor demand exceeding supply? This is what we call a bull market, which we experienced from 2000 to 2012. The opposite is supply exceeding demand, which is called a bear market. 

As always, the answer is not clearly black and white like we all want. A market plan depends on your assumptions about current inventory, how fast farmers will sell their crops, changes in government policy affecting agriculture, how the U.S. dollar will impact export demand and the big one: weather. Will there be a wet spring and a dry summer like 2012? Or, will there be a continued pattern of good yields since so much fall fieldwork was completed and soils will have recharged?

For brevity’s sake, I believe the burden of proof is now squarely on the shoulders of the bull to prove unexpected demand growth or significant yield reduction. Of course, we’ll have to wait until summer 2016 to see what happens. While this is nothing unusual for the grains and oilseeds to deal with, this year we also have the risk of big domestic and foreign supplies, possible rising interest rates and questionable growth in global demand.

Once the fundamental direction of the market has been determined, decide which tools you’re going to use to speed up or adjust your position in the market. Many call this technical analysis. 

I strongly suggest producers broaden their understanding of outside forces that affect ag commodities. For example, what would be the potential impact if the U.S. dollar were to break to the upside, the S&P go down while the bond market breaks long-term trending support and the gold and oil markets stabilize but cannot rally? Your understanding and opinions about these interactions will have a lot to do with the intensity of your 2016 marketing plan. 

Finally, once you have a plan and decide what tools to use to manage emotions during this turbulent time period, how will you use cash, futures or options to achieve your price objectives? I believe it’s important to have a back door in your marketing plan. Farmers need a floor below the market in 2016 perhaps more than in the past, but it is also important to have flexibility to react to a price changing event if it occurs. There isn’t one strategy that fits all when considering cash, futures and options. But acting sooner rather than later can pay big dividends in 2016 if Mother Nature doesn’t throw us a yield curve ball next summer.

The meat complex has taken a beating since August. The strong U.S. dollar is impacting exports and imports, and the meat bull isn’t excited about getting back into position because of cheap feed supplies. I can’t be too negative on the cattle complex after such a big price drop, but it’s hard to argue higher values. 

As spring nears, if the feed grains continue to move lower in 2017, cattlemen (and hog producers this summer) need to be prepared to sell on any seasonal price bounce during the first half of 2016.  

Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions.



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Spell Check

flying farmer
nebraska city, NE
12/8/2015 09:02 AM

  That is all well and good. But it is really this simple (even though I realize farmers won't have the nads to do it). NO MATTER how much PAPER GRAIN is traded at whatever prices the gods of trading decree corn and beans to be worth, EVENTUALLY if no one sells REAL GRAIN at those prices, they will have to raise the prices to get the actual grain sold. If no one actually sells any REAL corn below $5, eventually it will have to go to $5. IT IS REALLY THAT SIMPLE...

Western, NE
12/8/2015 09:34 AM

  It's difficult to get farmers to agree on how to cure low prices. Got to wonder how many positions are in the trade on borrowed money, which when interest rates increase will have the money exit the markets. That could be good for the markets in the short term. More than anything, farmers need to keep an eye on their local basis. That will dictate demand. If we do keep our commodities off the market and can afford to do so with storage charges and or interest on operating loans, basis becomes very important. One thing to remember if as farmers we can keep our grain off the market, end users have been known to skirt us and import the commodity they're needing--screwing us further. As I've always written, it doesn't matter how much grain we have or don't have, it is all in the perception of the trade! Right now, the perception is that we have too much which drives the price down. But, our exporters are screwing us too since they don't want to be the one taking the hit on their inventory and aren't aggressively pricing their commodities to move them.

Dave Burke
Smithfield, PA
12/8/2015 09:16 AM

  I agree. USDA= worthless puppets for corporate Big Ag. Less they pay those that do the work of growing , more they get to keep. How much does Big Corp Ag make on a bushel of corn ? I bet close to $100.


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