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DAVID KRUSE

By Staff | Jan 1, 2016

Oil producers, cattlemen, grain producers and other commodity producers are wrapped up in comradery right now as they are all playing the same game and it is not very much fun.

All these commodity producers are fighting the markets and somebody has to lose so the game can determine who wins.

They used to call this game “crying uncle.” If I remember it correctly from the days on the school yard you would get punched in the arm until you cried “uncle” and then they would stop hitting you.

All of these commodity producers have had some pretty good years where they have built up some equity and it takes a while for that to drain away until they become vulnerable to quitting.

You might think that oil producers are in bad shape given sub-$35 barrel oil, but oil companies were continuing to pay dividends so they must have lots of money. If they were too hard up they would be better hoarding their cash.

New technology in the oil business unleashed shale oil production and the Saudis started a price war to prove who the lowest cost producer is and who will curtail production.

Shale oil producers have slowed new wells and the current ones will play out before the bond payments are all made.

This is also geo-political. We can see how big of a thug that Putin is with $35 barrel oil so imagine how much trouble that he would be if oil was $100 barrel.

The Iranians have oil too but less cash because of the price. The Saudis know that they are the low-cost producer with more financial resources than any other producers so they will keep pouring the coals on until someone cries “uncle.”

They have invested a whole lot of money into this exercise so it would be stupid for them to stop now. They also have most of their assets invested in dollars which should be noted are appreciating as a result of the choice in currency reserve.

The Keystone XL pipeline is no longer financially viable with $35 barrel oil so that takes out tar-sands development. If $35 barrel doesn’t make someone in the oil business cry “uncle” then they will take it to a price that does. Would $20 barrel oil do it? Probably.

Cattle producers are also fighting the market.

Record highs in feeder cattle prices prompted feedlots to re-implant 1,300- to 1,400-pound steers that should have gone to market and feed them to record crazy weights instead of trade for replacements.

There may be fewer numbers, but they got backed up by slow marketings so overweight cattle in feedlots created a burdensome front end supply pitted against a backdrop of a market collapse with feedlots losing $500 to 600 per head or more.

They don’t want to take the loss so they keep feeding them and they get heavier and the market drops some more and the loss gets worse. Many pens of feedlot cattle will not return first cost purchase price.

Anybody leveraged in this business buying into expansion with the herd is not going to survive. Feedlots need to transfer inventory to packers so they have a vested interest in fat cattle values and feedlots can’t stomach taking that much loss all at once.

Cheaper feeder cattle should help them make the trade of fats for feeders.

Joining commodity producers fighting the market are corn and soybean producers who balked at prices this fall and stored the crops in the bin wishing and hoping for higher prices.

The likely result is that they are storing for lower prices and prices will not rise until they sell. End-users know that there is plenty of supply, some producers are dumb enough to use “no price established” contracts, and why would they want to own a devaluing commodity until they need it?

Producers have come off some good years where they banked some equity so that their credit is good at the bank if they want to hold grain.

They realize that the balance sheets are burdened with supply and somebody has to cut back production somewhere in the world. If not from the Ukraine or Brazil then the Dakotas?

The Fed is pursuing a monetary policy that strengthens the dollar, making U.S. corn/soybeans more expensive than competitors’.

The full impact of this has not been felt by export markets yet. The higher the dollar goes the worse that it will get.

Instead of reducing soybean production, Brazil’s weak real gave incentive for Brazilian producers to increase acres. The devaluation of the Argentine peso will do the same to Argentine production.

Reducing export taxes and devaluing the currency will provide significant incentive to Argentine producers to unload the stocks they have been hoarding and plant more.

The “cry uncle contest” in the oil industry carries over into biofuel and the corn markets.

Ethanol cannot compete with $35 barrel oil with the current price of corn. Corn and soybean prices track oil prices and during the recent weakness in oil, corn and soybean prices held up which was actually a divergence that could collapse at any time.

I think that there is a fairly good chance that farmers holding grain that balked at prices this fall could be given the chance to sell cash corn for $2.something and cash soybean prices starting at $6.something.

Loan demand in order for farmers to hold this grain has reportedly been going up so you can see where this stubbornness is heading.

Sometimes being in good enough financial condition to store grain is a losing proposition if held too long.

I don’t see much more to help grain prices until well into 2016 when weather can again impact thought and price discovery.

There is a common theme that commodity producers are all fighting the market and the typical result is that they get their heads handed to them.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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