Prepared by Richard A. Brock & Associates, Inc.
The boat is leaving harbor (for making marketing decisions) and too many people are either paying no attention or assuming that the boat is going to come back again for another launch. Maybe? But we doubt it! We believe that corn and soybean prices are currently offering one of the best marketing opportunities we are going to see between now and any kind of weather scares next summer. If these opportunities are not taken advantage of soon, there may be a lot of unhappy campers when it comes to paying bills this coming spring.
Markets are not easy to figure out, but understanding human reactions helps. People are very predictable. There are two human characteristics that prove consistently to be self-destructive in commodity marketing. They are:
1.) People believe what they want to believe. Right now people want to believe that the bull markets of 1996 were the predecessor of what is coming over the next three to five years. People do not want to believe that the bull market of 1996 itself was the fluke and that overall commodity prices are still in long term deflationary trends.
2.) Why make decisions today if they can be put off until tomorrow? In other words, why hurry on selling this year's corn and soybeans, let alone next year's, since we are just now harvesting this year's. There's a lot of time left. Right? Sure there's a lot of time left. But the market is telling you that today is a decision making time, not when your neighbor is ready to make the decision. Markets have no soul. They don't give you opportunities when you necessarily want them. We have to be prepared to take the opportunities when markets offer them!
Once again, if the news is not positive many people would like to ignore reality. Just in the past year, consider the following:
1.) Hog prices have declined by 12.5% from $56 to $49.
2.) Beef carcass prices are down 4%.
3.) Cotton prices are down 6.5%.
4.) Corn prices have declined from $3.18 to $2.55 in central Illinois, a drop of 20%.
5.) Soybean prices have declined from $7.91 to $6.38 per bushel, a decline of 20%.
6.) Wheat prices have declined from $4.29 to $3.50, an 18% drop.
But even more important is to look at worldwide trends. Over the last three years we have adopted a new U.S. farm policy, passed a GATT agreement and a NAFTA agreement. All appeared very positive on the surface because they opened up worldwide trade and let loose the reins on agricultural prices domestically. As we've pointed out many times in this newsletter, however, these three significant changes in U.S. and world policy will result in much more dramatic price swings with highs being higher and lows being lower. In the last two years we have experienced one half of the equation–but not the other.
What has occurred in the worldwide labor market is a good example of what happens on the deflationary side when you increase worldwide competition. Unskilled labor pulls down the rest of the world to the lowest wage rates available. In the case of commodities, the first impact is an increase in protein consumption as witnessed in Asia through a sharp increase in pork and beef imports. Demand is increasing–there is no doubt.
But what also occurs is an increase in competition to offset the increase in demand. The laws of economics have not been repealed. Keep the price of anything high enough long enough and some one will find a way to grow more of it. It is occurring dramatically throughout the world in wheat, corn and soybean production. Production increases in South America are running at a record rate. That trend will continue.
The Bottom Line: What we are going to find is that we are now on the side of the production curve that will result in production exceeding demand just as demand exceeded production two years ago. The pendulum always swings too far in both directions and most of us have very short memories.
Corn and soybean prices in the last month have been reacting negatively to bullish news. Every time the USDA releases a bullish Crop report, the market might rally for an hour and then be over. Strong exports have the same result–higher openings followed by lower closes. This is a very negative sign when markets cannot go up on bullish news.
To add insult to injury, too many people are too complacent. Again, it's early in the marketing season so why worry about making marketing decisions now?! The answer is simple–the market is telling you it's time. People don't learn from their mistakes in most cases–they just repeat them in a different manner. We must also remember that markets hardly ever behave the same way two years in a row.
Even with a 9.268 billion bushel corn crop, carry-over supplies this year are expected to be 864 million bushels–only slightly below last year's. The stocks- to-usage ratio is slightly under 10% which should yield an expected average price basis Central Illinois of about $2.60. That is precisely where the market is trading right now, which means that corn is priced “at about average.”
But from a seller's point of view, keep in mind that $2.60 corn right now is the equivalent to $2.75 corn on March 1 (assuming three cents per bushel per month for carry) that puts a different light on the current market. All of a sudden, $2.60 corn at harvest is high priced corn–not low priced.
Soybeans are not much different. With an expected production of 2.746 billion bushels, the carry- over for this year is expected to be 285 million based upon the USDA estimates. We think it will be closer to 316 million. This compares to this last year's 115 million and the previous year's 183. At this level, soybeans will struggle to average $6.00 per bushel and our guess is $5.80 to $5.90 will be closer. Central Illinois is currently trading in the high $6.00 range and pounding close to $7.00. Assuming it takes 5 cents per bushel per month to carry soybeans, soybeans sold at this price level are going to be well above the expected average price of the year.
By looking at this year's corn charts, even a novice technician can recognize that the major trend in these market has shifted down and that massive technical reversal tops have occurred in the last eight weeks. As a technician, this is a market that one has to be short in.
Soybeans are not different. The key reversal that occurred on August 4 has stopped every rally. Another reversal down occurred on September 18. The market is currently challenging the key resistance areas but the reversals are all holding. This is a market that is offering very limited risk selling opportunities since the risk of being wrong is now a close above the key reversal high of September 18.
Additionally, look at the new-crop November 1998 soybean chart and the December 1998 corn chart. Once again, these are markets that are screaming major tops. Reversal patterns have occurred everywhere and prices are struggling to move higher. These are markets that are flashing red lights to “sell.”
Following past advice strict cash marketers and hedgers are already 40% sold in old crop corn and soybeans. Hedgers are also covered on an additional 30% of this year's corn with long December $2.70 puts and on another 30% we're short December futures. All positions are profitable and over the last few months we've put considerable profits in the bank on previously lifted hedges. We're also short July 1998 corn on 30% of next year's anticipated production and December 1998 on another 20%.
To us, this is actually a conservative approach. Why? Because prices are trading at levels above the expected average and technically are trading at areas where the risk of “being wrong” is very small. Over the next two months the downside potential is much greater than the upside potential. No one knows how low this market can go, but we feel confident that the upside is limited. You don't make marketing decisions based upon how low it's going–you make decisions based upon what opportunity there is in the upside–which is small right now.
September 26, 1997
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