This article is brought to you by:
CONSENSUS
AG INVESTOR
Prepared by North Star Commodity Investment Company
The Good, The Bad And The Ugly: The Year 2000 In Review
(January 5, 2001) For many farmers this was a year of some of the best profits ever, while other producers in some of the dry weather spots are having a difficult financial time.
The Good
Livestock prices rallied back to great profit levels this year with cattle feeders and ranchers having a great year. For grain farmers who sold ahead and then played the LDP game right, the combination of the large yield, hedge profits, and LDP created a record gross income. Unless you were in one of the drought areas of the corn belt , this had to be one of the best growing seasons ever for getting the crops planted and harvested.
The Bad
Sharply higher energy prices created a large increase in farm operating costs as crude oil went from $24 dollars per barrel to over $37 dollars per barrel by this fall. Natural gas, which started out at $2.12 per 10, 000 mmm BTU 's increased by over 400%to $9.80 by December. This has jumped fertilizer prices and will likely lead to spot shortages of anhydrous ammonia by next spring. The combination of higher fuel and fertilizer prices combined with reduced government payments next year will drop net farm income, even though commodity prices are likely to be higher in 2001.
The Ugly
I hate to again write about StarLink Corn, but it is certainly a major story for last year. It is ugly, and we see a lot of places to lay the blame: the company that sold the product without making full disclosure, the USDA for allowing the sale of the corn to the public before it was approved for human consumption, and the fact that nothing was announced to farmers until harvest was into full swing. Fortunately, if we get a good demand driven bull market for corn, this ugly story will disappear.
A Look Ahead At 2001
The Good
Odds are good that the uptrend in commodity prices will continue next year as global demand increases and higher energy prices result in less feed grain production. China continues to be an aggressive buyer of soybeans. With China 's entry into the WTO look for China 's corn exports to drop substantially in the next marketing year. It looks like corn and wheat-ending stocks will drop much lower this year and any weather problems in the Southern or Northern Hemisphere will send prices sharply higher. The attitude in the trade has changed from sell every rally to buy the dips.
The Bad
We look at budgets for corn belt farmers next year. The combination of lower LDP payments and higher energy costs results in $20 to $30 less net income for corn next year, unless you plug in some very high prices for corn in the spring and summer of 2002. To get this year's profits with the same yields, corn futures will need to trade $0.60 to $0.70 per bushel higher next year than this year. That kind of rally in the corn market would hurt livestock and ethanol profits.
The Ugly
I am very concerned that a lot of the profits that have been made it the cattle industry in the last year will be given away in 2001. If you stay disciplined in your purchasing and wait until feeder cattle prices drop back, you can have a good year. The cattle bulls that do not push a pencil may have a real ugly year. If corn prices rally sharply higher, livestock and ethanol profits will drop significantly. Now after two years of great profits in the ethanol industry, be cautious in expanding your commitments and make sure you are not overcommitted. If you have over 50%of your corn production committed to ethanol plants, consider lightening up your commitments while share values are high.
Economic Update
In a surprise move this week the Fed dropped short-term interest rates this week, and the stock market soared higher. This early gift for President-elect George Bush is likely to be followed by more rate cuts in the next few months. The U. S. Economy is slowing, and we may be in for a hard landing (real recession)if rate cuts to not help stabilize the current slow down. What does this mean for farmers? The lower dollar that has occurred in the last two months will help exports. With the Fed now worried about a recession, look for the nation's money supply to increase and little attention to be focused on higher energy, grain, or meat prices. Historically we are in the environment that favors higher commodity prices, the key being that a major U.S. recession, if it develops, does not pull down the economies of our major trading partners as well.
The Hog Report Was A Non Event
The quarterly hog report had very little impact on hog prices. The numbers show the hog herd is just beginning to expand. This should confirm that cash hogs should remain in their sideways trading range with $35. 00 support and $44. 00 resistance for another 3 to 5 months. The most bullish outlook would be for higher grain prices, which will eventually pull hog prices higher.
Feeder Cattle Update
If Thursday USDA report is bullish for corn and wheat, it may be the end of the bull market in feeder cattle. The weekly chart shows prices testing all time highs. However, a $0.30 rally in corn prices will quickly make the feeder cattle look severely overpriced. A weekly close below the steep up-trend will be your signal to sell April feeder cattle futures.
Analysis And Strategy
CORN: March corn futures chopped sideways to lower this week. Producer sales increased as we entered the new tax year. Also with the weather warm up in the Midwest, grain trucks were finally able to haul grain. Export sales and loadings were dismal again this week with year-to-date exports now 12% behind last year. Grain traders have been reluctant to enter into new short positions ahead of next week's USDA Supply/Demand report. It is worth noting that the December 1 corn stocks report has been below trade expectations in six out of the last six years including the near 250 mil. Bu. underestimate of December 1, 1999 stocks reported in January of 2000. We definitely see mixed signals coming into next week 's USDA report. With this dismal export pace feed usage and industrial usage (ethanol) needs to increase in next week's report for old crop corn futures to keep trending higher. Technically March CBT Corn ran into resistance at $2.32 with December having resistance at $2.62. Look for support $0.03 $0.05 lower. Another positive signal would be to see corn prices close above the recent highs.
Strategy--On earlier sales, 30% last spring and summer and 20% in November, cash corn sales should be at 50% with all corn in commercial storage sold. All of the LDP was locked in last fall at $0.27 to $0.41 per bushel. If you are long futures, stay long. If March futures close below $2.20, we will re-evaluate the long positions. Longer-term, the next target for July corn to make additional sales is at $2.48.
FEED CORN: Cash feed corn should be locked in through June of 2001 on advice made in late September to early October. You are ahead $0.30 to $0.40 per bushel on that recommendation. Stay long; we will consider adding additional feed coverage early next week.
SOYBEANS: Commodity fund liquidation of soybeans and meal combined with improved crop prospects for Brazil dropped soybean prices to new 7 week lows this week. The soybean market is discounting record soybean demand as trade attention focused on supply (South American production) this week. Soybean processing margins are still very high, so U.S. processors are improving basis bids to get cash ownership of soybeans. With the $0.25 drop in soybeans over the last two weeks, soybean futures are now below the uptrend line and the 50-day moving average. The next key support for March CBOT Soybeans is at the November 16 low at $4.84 resistance levels are now at $4.98 and $5.05. Unless a major weather problem develops in South America or the USDA has a big surprise in the numbers next week, look for a trading range, choppy market to develop.
Strategy--Producers locked in the soybean LDP at $0.89 to $0.94 last fall. On the rally into Thanksgiving, cash sales were increased to 50%. Producers who were long Soybean futures were stopped out this week with the January futures closing below $5.00. Longer-term, we anticipate higher prices and will look for a place to reown the soybean market with long futures or call options.
SOYBEAN MEAL: Long liquidation and unwinding of the long meal-short oil spreads dropped soybean meal futures lower this week. After a $30 per ton six-week rally a setback was due in the soybean meal market. The next key support level to watch for is at $180 in the March CBOT Soybean meal. Unless weather problems develop in South America, look for support at $180 and resistance at $197 as soybean meal goes into a trading range type pattern.
Strategy--Livestock feeders are bought ahead through June to August of 2001 and area ahead $15 to $20 per ton. Stay long.
WHEAT: The hard drop in winter wheat crop conditions along with concerns of a smaller wheat crop in the Southern Hemisphere combined to rally wheat futures higher this week. The world is short of high quality milling wheat, so look for wheat premiums to stay firm. Technically, the wheat charts all show an impressive break out to the topside. Nearby CBOT wheat is within $0.03 of last year's high, a close above $2.86 by nearby wheat will be a positive signal for wheat price outlook. For KC and Minneapolis wheat, the key to watch is for a close above $3.40.
Strategy--All of the wheat LDP was locked in during the lows in early August. Cash sales were recommended the weeks of October 13 and October 20 bringing sales up to 50%. Producers who use futures and options bought wheat futures the week of December 17; stay long. Seasonal odds and long-term market cycles both project higher prices ahead.
WEEKLY NATURAL GAS: The price of natural gas continues to hold at extremely high levels. This will continue to heighten concerns about potential shortages of anhydrous this spring. If natural gas prices close above 10.1, odds are high that shortages will occur this spring. If this happens end users, (livestock producers, ethanol, etc.) should consider buying cash corn. It is far less of a risk than paying for high input cost and hoping for a good crop.
HEATING OIL: Despite the near record cold, heating oil prices are trading lower than one month ago. If temperatures turn cold in late January, it may be wise to book 50% of your spring fuel needs.
HOGS: The cash market continued to struggle through another shortened kill week. The pork cutout values also declined but this may actually become a friendly factor increasing the interest in both domestic and export demand. The average slaughter weights declined to their lowest level since mid October. We continue to hear of health problems, and the month of January should result in lower than expected market hogs. If we're correct we should be in for one more short rally before prices once again begin to decline. The futures market ignored all of the negative news and managed to close higher for the week. The weekly chart shows prices trading in a $10.00 sideways pattern since late August. Two consecutive closes above $60.00 would confirm a breakout of this price range and open the door for a test of $64.00 to $65.00. For the short-term, we remain cautiously optimistic that prices will continue to rally. Our biggest concern is not the price of hogs but rather the price of feed. The fundamentals for corn could change drastically, depending on January 11 crop report. If this report is bullish to corn, we will advise corn needs to be extended to 100% through December of 2001. Our first choice will be to buy cash corn. Our second choice is to buy cash corn as you use it, saving previously purchased corn for a later date. Our third choice would be to buy May corn futures.
Strategy--On previous advice, you should have 25% of the hogs covered through June at profitable levels. No additional hedges are advised. Focus on feed needs.
CATTLE: The cash market has held steady, supported by strong box beef values which have soared to record levels. The average slaughter weights failed to decline last week, which we feel is slightly bearish. However, unless beef cutouts begin to decline rapidly it should help pull futures higher. The worst thing about high cutout values is that they will eventually reduce consumer demand. As of now, we feel the cash market is where you need to place your risk. If corn prices begin to rally, it will limit weight gains but would likely have a much more negative market effect on feeder cattle. This is not the time to replace sales with high priced feeders. Technically, nearby futures closed lower for the week with prices down testing support at $76.50. Major support is at the breakout level of $75.00. We expect one more rally to take place as we move into February.
Strategy--Maintain hedges and February calls covering 50% of the cattle.
FEEDER CATTLE :If the January crop report for corn is bullish, it would be advised to sell feeder cattle rather them feed them out. In addition, place orders to buy April $88.00 puts as cheap insurance against sharply rising grain prices.
USDA Supply/Demand Outlook
Thursday morning the USDA will release the final crop estimate for the 2000 crop. In corn, the big numbers will be the final yield which is currently pegged at 137.7. A final yield below 136 is needed to keep the market price friendly. We look for domestic usage to increase due to cold weather and the potential increase in industrial use. We expect the USDA to lower corn exports by a 50 to 100 million bushels. In the soybean numbers, we must see the final yield decline from 38 bushels per acre to 37.5 or lower. In addition, we need to see an increase in exports. In order to stay price friendly, soybean ending stocks must fall below 300 million bushels. As for the wheat we must see a slight reduction in ending stocks.
Interest Rate Update
In the October 9, 1998 issue of the Ag Investor, we said "Run do not walk and get all long term real estate loans locked in." This proved to be great advice as the cost of long term mortgages went up by over 2% in the next two years. We now see some of the best long term loan rates that we have had available in the last two years being offered. If you have bought a farm or need to refinance a farm in the next few years we feel that within the next 3-9 months you will have a great second chance to lock in some very attractive rates. Now is the time to get the paper work started and get some of the applications in--by shopping now and getting as much documentation done this winter you will be in a position to lock in these lower rates--when we make the recommendation. With higher energy costs, a lower dollar, and the bid tax break that is likely to get pushed through congress -its just a matter of time until inflation and interest rates turn up again.
January 5, 2001 Alan Kluis and Mark Schultz North Star Commodity Investment Company P.O. Box 15086, Minneapolis, Minnesota 800-345-7692
Hosted by:
CONSENSUS, Inc. and INVESTORS
CO-OP
P.O. Box 411128
Kansas City, MO 64141-1128
816-461-2800
Fax: 816-461-2801
editor@consensus-inc.com