Spring is near. Producers are preparing planters for another mad dash to get seed in the ground on schedule. While there is still a spring in everyone’s step, anxiety is surfacing about producing a crop that “might” not cover all costs. Producers with a little gray hair remember the 1981 to 1987 period of economic stress after the roaring 1970s and 1980s and are wondering if it could happen again.
While I don’t believe U.S. farmers have overbought land as they did in the late 1980s, good profits from 2001 to 2013 have pushed up the cost of everything—from machinery to fertilizer to cash rents. Profit margins for many are still good as long as net values remain above $4.50 in corn and $10 in soybeans, but the grain markets have now broken cash values down to levels where it is getting their attention.
While I constantly talk about selling early and defending, most producers like to store grain and sell it on seasonal strength when they need the money. Producers now have a lot of grain storage capacity and elect to use it rather than aggressively forward selling inventory. For the past 15 years, they’ve learned if they wait long enough something will happen to bail them out.
Unfortunately, this learned behavior was based on the perception that demand would continue to expand faster than supply. As we now know, there were other factors at play. For example, China was experiencing historic economic growth that is now slowing down. Granted, India and parts of Africa will grow in population, but I question if they will have as strong of an economy as China to buy.
While there have been some significant weather events during the past few years to reduce yield, technology is improving the ability to produce more. In fact, as grain prices move lower and costs remain high, producers will be forced to produce more bushels to raise enough capital to keep their operation solvent.
We are in the middle of a demand and supply realignment that was about to start in 2012 but got distracted by a historic yield reduction event. In essence, the world has brought too many acres into production and must now entice producers to consider other alternatives. We all want a soft landing but history suggests once acres come into production, they only go out with significant financial pain.
How long will it take? Without a major yield reduction event, I do not expect to see long-term lows until the fall of 2017. So I will say it again: Sell early, sell hard and only defend if the markets close above overhead resistance after the crop is planted. If we do see a late June to July weather scare event, use it to sell expected 2017 production.
The good news is the cattle and hog complexes have seasonally rallied from the late 2015 lows. This rally is impressive in light of the strong U.S. dollar and the drag it has had on beef and pork exports. Seasonally, cattle should top out this spring. I anticipate strong demand for feeders this fall and a willingness to walk cheap grain off the farm.
Some disease problems have pushed hog prices back to old highs. Producers should be using this strength to lock up expected fourth quarter 2016 and first quarter 2017 marketing. Sell below the uptrending support line or long-term moving average. Essentially, you’re preparing to sell and letting the market tell you when. If the sell signal occurs quickly, buy deep-in-the-money puts to allow flexibility to improve the selling price.
I can’t emphasize it enough: Livestock producers need to take advantage of significant strength in 2016 to protect expected 2017 production. Lower grain values and the impact of a stronger U.S. dollar on exports will bring pain to the hog and cattle industries. You have been warned!
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