Published on: 09:46AM Dec 23, 2010
Back in 2006 when I wrote the $12 Corn Special Report, I sensed a global change occurring in our U.S. crop markets. We were moving into a global economy with worldwide buying interest in our commodities, rapidly increasing ethanol demand, and a financial structure indicating that elevators would quickly run out of margin money if prices turned bullish. It looked as if all we needed was a perfect storm of these factors coming together to vault commodity prices to record highs. As you know, we got it. Now here we are four years later. Do you see what’s happening?
The ethanol plants we killed—just as forecasted in the $12 Corn Special Report report—have come back strong and are burning through better than 4 billion bushels of corn a year. International use of ethanol is growing. According to the International Ethanol Report 2010, foreign countries are developing mandates requiring biofuel use.
The buy-and-hope commodity investors are back in the game, and China and others continue to buy our crops to feed their people. Once again, we are in a position where it looks like we could just flat out run out of key commodities, such as corn and soybeans. And just as I warned back in 2006, the elevators can run out of money, margin liquidation can cause massive market disruptions, and our commodity prices can go to new record highs. The record corn highs now will be beyond $8 for corn and much higher for other commodities.
When commodities rally, they typically stop at previous highs or blow through those highs, leaving them far behind. History has shown us that when commodities go to all-time highs, they usually reach 130 to 140 percent of their previous levels. That is on the conservative side. In extreme instances, commodities such as sugar, lumber, and others have gone up as much as 300 to 400 percent. Wheat did it just a few years ago. There are many factors that can drive prices to extremes. It could be something as simple as a weak U.S. dollar driving exports. Or it might be something as severe as a widespread drought (heat or lack of moisture). Back in the ‘70s and ‘80s, significant parts of the Corn Belt experienced droughty conditions about every 3 to 5 years. We were producing much more crop than we needed most years, and the occasional drought came along to wipe out the excess supplies and put the world back in balance. These days, the supply-demand balance is almost already out of balance, leaning towards almost no carryover supplies in major commodities. Should we have a widespread drought (remember – it can either be high heat or lack of moisture, or both), the bullish fuel this would add to the fire is almost beyond comprehension.
So what kind of prices can you expect to see in the next record bull move? Well, again, for a conservative number in corn, history tells us it will reach 130 to 140 percent of previous highs. Given our previous high of $8, the low side would be $10.40. More optimistic projections would forecast the $11.20 level for nearby futures. Remember, these are the conservative and low estimates. On the high side, history tells us that during extreme bull moves, prices can reach 300 to 400 percent of previous levels. That would indicate $24 to $32 corn!
Let’s look at soybeans and other commodities:
· The previous high on beans was $16.63 in 2008 – 130 percent of that is $21.60 . . . 400 percent is $66.50.
· The previous record high for Class III milk was $21.38 in 2007. A record rally could bring $30 to $32 milk on the conservative side, and 300 to 400 percent rallies would put prices into the $69 to $92 range.
· The previous record high in crude oil was $145 per barrel. A 130- to 140- percent run past those levels is $188 to $203 – a 300- to 400-percent rally would equal $435 to $580 per barrel.
I have no doubt that these record high price levels are possible. The ramifications can be broad and extreme. We saw the beginnings and hints of this when corn, soybeans and wheat reached record highs. Fertilizer prices went sky high, land rents shot up, and land prices marched higher. All of the sudden, producers who had two or three years worth of crop prices locked in at what looked like very profitable levels were in shock over their red ink.
Just ask any dairy producer. Record profitability in the dairy industry for a number of years led to continually increasing production levels, and ultimately, massive price declines and red ink that most producers and their bankers never imagined could occur. Producers hurt the most were those who had locked in feed prices at high levels. There were dairies losing $1 for every $1 they brought through the door. In 2009, the milk price plunge wiped out many dairy operations.
I think it is very safe to say that future volatility will cause widespread pain and put many producers out of business. When that happens, it can open the door to unwanted company –for example, corporate America investing in, and taking control of, grain farming operations as we know them (see previous blog).
Continued, ever-greater volatility is the reason you should approach marketing with your eyes wide open to the possibilities. You have to imagine corn doing what’s hard to imagine—because the world will change, while economic themes repeat.
Don’t focus on the prices I’ve mention, and don’t become complacent with prices that look good in the moment. Rather, adapt your marketing to the point where you position yourself to maximize opportunity—within a reasonable risk parameter—as events that cause major volatility begin to unfold. Always take as much profit off the table as reasonably possible by doing your marketing well.
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at [email protected].
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