I firmly believe that history repeats itself and those that don’t learn from history; will repeat the mistakes of the past. That brings us to the focal point of this article. At some point in the next couple of years, I believe another financial crisis will hit the farm economy and we again may see another exodus of producers leave the most honorable profession in the world; production agriculture.
I was too young to remember the early 1980’s, but I have lots of stories about the financial hardships faced by farmers in that timeframe. Increased expenses, combined with a steep rise in interest rates, huge carryout levels that pressured commodity prices; and led to a weakening farm economy and a massive exodus from the farm to the cities where some farmers took mobs to pay their bills. Another wave of contraction occurred in 1998, this time in the livestock sector as the price of lean hogs fell below 30 cents/cwt and live cattle were below 60/cwt. Several years of large grain production led to plentiful supplies of world commodities. Feeding of hogs and cattle were profitable and with the cheap feed costs due to the large gain inventory levels; farmers expanded their livestock production facilities past the point the market was able to bear; and livestock prices plunged under the extra supplies. This brought another wave of liquidation from the farm sector.
The handwriting is on the wall for the farm economy. A record demand base has been built through the first half of this decade which has driven commodity prices to all time record highs. Farm expenses quickly followed in the wake of rising commodity prices. Land values have risen, including cash rent for farmland; fuel expenses, seed expenses, chemical and fertilizer expenses and every other expense needed to produce either grain or livestock also soared to record high levels. As long as the prices farmers receive for their produce remains high, the farm economy will remain healthy. But what happens if those prices fall sharply lower?
The ability of the American farmer has never been underestimated and the ability should never come into question. However, compared to thirty years ago, the ability of the world’s farmers must be contemplated. The United States is the world’s largest producer of corn, but is now the second largest soybean producer behind Brazil.
Corn closed the week $.17 1/2 lower. The weekly export sales report showed net sales of 422,800 MT were down 8 percent from the previous week and 37 percent from the prior 4-week average. Increases were reported for Japan (292,300 MT, including 79,600 MT switched from unknown destinations), Morocco (113,200 MT, including 67,200 MT switched from unknown destinations and 25,000 MT switched from Tunisia). Decreaseswere reported for unknown destinations (305,600 MT), Guatemala (33,400 MT), and Tunisia (25,000 MT).
Net sales of 729,200 MT for delivery in 2009/10 were primarily for Mexico (145,000 MT), unknown destinations (138,800 MT), Colombia (127,500 MT), and South Korea (118,000 MT). For the marketing year, the U.S. has now exported 1.863 bb of corn compared to 2.419 bb last year. As of August 2, the 2009 crop was rated at 68 percent g/e vs. 66 percent a year ago. This is the highest rated crop in the last five years and the second highest crop rating in the last 9 years. R.J. O’Brien is using a 157.4 bpa yield estimate, which if realized, would be the second largest in history. Due to slow demand trends, ending stocks will likely swell to over 2 billion bushels. With the large ending stocks figure, it does not leave a very bullish outlook for prices over the next four months. Producers should be prepared to reward rallies with additional sales and hedges.
Producers should have sold all their 2008 crop. Producers should have managed their risk by placing new crop hedges when December reached the initial upside target of $4.25 to $4.50 range. Producers should have used a combination of cash sales, hedges and put options to effectively manage risk. December contract fell to $3.25, and producers should have now rolled those options to a lower at the money strike price to capture hedge profits. No reason to get long until more about the crop size is known.
Soybeans closed the week $.43 1/2 lower. The weekly export sales report showed net sales of 494,500 MT were double the previous week and the prior 4-week average. Increases were primarily for China (405,000 MT), Mexico (26,200 MT), unknown destinations (25,000 MT), Taiwan (18,800 MT), Costa Rica (7,900 MT, switched from Guatemala), and Indonesia (7,500 MT). Net sales of 2,413,300 MT for 2009/10 delivery were primarily for China (2,317,000 MT), with lesser amounts for Egypt (60,000 MT), Mexico (22,200 MT), unknown destinations (9,500 MT), and Colombia (4,000 MT). For the marketing year, the U.S. has now exported 1.305 bb of soybeans compared to 1.149 bb last year. The The USDA rated the soybean crop, as of August 2, at 67 percent g/e, 4 percent higher compared to last year’s crop rating of 63 percent. This is the highest rated soybean crop in the last five years and the second highest rated soybean crop in the last 15 years. Soybeans are currently in the key podsetting stage. Soybeans have rallied over $1.50 as the market has added in weather premium due to a hot and dry forecast for early August. Rains in the last half of August will cause the market to remove the weather premium and prices will fall. No rains in August and prices will rally and likely challenge the summer highs. All indications are for South America to plant a record amount of soybean acres this fall in response to the strong soybean prices.
Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.
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