Fast Facts


DTN – Jerry Gulke
Sep 17, 2008 10:12 AM

Although this was a holiday-shortened trading week, corn dropped 33 cents, beans fell $1.40 and wheat was down 50 cents. These decreases are overshadowed by wheat at new low closes for the year, soybeans near the January lows, and corn nearing the March lows and within 50 cents of the January lows. Soy oil, once thought to be in short supply worldwide, closed lower than at any time since January 1. Put another way, anyone who bought commodities from January 1 to March 30 has a margin call. They have been long and wrong.

Some took on marketing themselves, or hired some of the best commercial firms to help them manage risk, yet lost millions from hedging. It wouldn't be so bad if the hedge was an honest loss. But, like so many undercapitalized businesses, they didn't have the money tore-sell longs they were blown out of when margin requirements became too big to handle.

It never ceases to amaze me that after all the years we producers were admonished to manage our market risk using futures and options, there are still end users who do not do so. And they justify their lack of management ability by blaming the high cost of commodities.

Truth is, there was really no excuse for any end user to not have covered a year's worth of usage last December. Never mind about 2009 -- just doing it for 2008 would have relieved a lot of the cost/price squeeze whining and crying we heard on CNBC a few months ago.

Covering 2009 needs now is a moot point as the bull dance is likely over and time is on the end user's side. Anyone with a bullish stance, who thinks commodities (especially corn and beans) have to go higher, is likely going to dance alone.

In the last two months we have seen gross grain production income drop precipitously. I noticed back in April that John Deere stock topped out near $95. It has dropped continuously since then to Friday's close at $63. All while stock pundits advised owning anything that smacked of being on board the grain market bull run.

Smart money was getting out of ag-oriented stocks before our grains topped in June. Interesting isn't it? It tells me the equity market realized we had crude oil prices and ag commodity prices high enough to curb demand much sooner than most thought.

Another case in point is ADM, whose stock has lost 50 percent of its value since -- yup, you got it -- April! Even Monsanto, with a monopoly on product and price, lost 30 percent in same timeframe.

What I am getting at is that ag equities were being sold -- or certainly viewed as out of favor -- by those with real money to invest (not the wannabees on TV) long before we topped out corn and beans. Now, with our products worth $400 per acre less than analysts' best estimates, could it be that a lot of those machines that were ordered may go undelivered as producers find cash flow isn't what it looked to be just two months ago?

For weeks I have been suggesting those things that brought us to the bullish dance two years ago were all but gone. The weak U.S. dollar, the strong Brazilian real, the strong euro, money flowing from spec and index funds, weather, and a robust global economy -- all have turned around.

It has been my focus to continually look over my shoulder to wonder what could sneak up behind us and put an end, even temporarily, to our good fortune. Pick up any newspaper and you will read about poor economies in Europe, China suffering from lack of U.S. and world buying, India in question and all of Asia taking a pause. Not to mention, the irrational exuberance of some importers who decided to go it alone and grow their own. Egypt is renting land in Africa to grow wheat, and the arrogant Russians wanting to control their export markets to squeeze more out of a dry economic buying public.

High prices were a great fertilizer and the world responded. Now the marketplace has responded by exiting these risky items and heading for safer havens. Trading at the CME dropped over 30 percent in July, mainly due to less financial trading. But a falling tide lowers all ships and interest in commodities has suddenly turned from a "wise investment" to something to shy away from while the dust settles.

I have written before about the witch hunt launched by some senators, led by Sen. Dorgan of North Dakota, to ban speculators from trading commodities. Pull up any commodity and see if it looks like what has been done is good for ag, let alone commodities in general. Granted things could turn around with a bullish Supply and Demand report next Friday from USDA. But I wouldn't -- and have not -- bet the farm on it.

Attention from the Dorgan fiasco has been diverted to the presidential dilemma. McCain has said he wouldn't sign any farm bill. Obama may not know much about ag or like ethanol. Will we have any type of farm program at all under either administration? The fact is, we are so far away from any safety net that it doesn't matter much. We spilled more being long corn in the field or on the CBOT as end users than we'd ever get in direct payments. Disasters and drought are part of farming. And if prices get back to where the safety net is of value, the disaster in agriculture will make the sub-prime mortgage mess look like child's play.

After being under a safety net for so long, prior to the new plateau in prices, we may have gotten so used to some sort of downside protection that rigor mortis sets in when prices retreat, catching producers like deer in the headlights. The free market enthusiast would suggest that if we didn't have government revenue aid, we'd have gotten our act together long ago and the most efficient would survive as CEOs and the rest would be mere plant managers, driving the tractors for the CEOs. Perhaps that is what government now has in mind, as it can't possibly fathom another farm crisis. But something less than $4 corn might just bring it on. The last two months have been a business environment in which grain options were meant to be used. Don't practice unprotected marketing going into the report next Friday.

With world economies now in jeopardy due to higher prices for food, fiber and energy, the only thing left to support our prices is a bullish crop report next Friday. I will be reviewing the report, plus taking a look at the commodity outlook at the Silveus Ag Summit at the Grand Wayne Convention Center in Fort Wayne, Ind., September 12, along with Dr. Elwin Taylor (Iowa State professor) and Dr. Michael Swanson (VP and ag economist for Wells Fargo). For more information go to www.cropins.net/agsummit.asp. This summit is FREE if you pre-register on their website or call them at 1-800-531-9909. Mention that you heard about the summit reading my DTN article. I hope to see you there.

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Ag Update PDF - Crops September 2008