My column is late because I was on the road four days last week.
The first three days were at the Nebraska Ag Classic, the annual meeting for eleven farm organizations. I really like having those organizations meet together because it gives all of us an opportunity to talk with farmers outside of our normal circle. Friday, I spoke at the Nebraska Soybean Expo, a trade show that is held annually at Wahoo, Nebraska. The farmers at that get together are more narrowly focused on soybean and corn production and are generally from eastcentral Nebraska.
The big topic of conversation at both meetings was the price of grains we produce and inputs that we buy. I came away from both places convinced that the recent volatility is not about to go away soon. It was difficult to judge the attitude of those around me at those meetings. Everyone was naturally happy about the good grain prices, especially when the price went up all week. There were a lot of comments that their neighbors were too optimistic and that prices at these levels could not last forever. This indicates to me that we are not at the top yet.
The rising cost of inputs is a big concern. Even those of us old enough to have farmed during the last time prices sought a new plateau realize that the cost of production rises to match the higher level of grain prices. Farmers want to farm so badly that they shoot themselves in the foot during good times. They then have to endure the pain when the good times end.
Speakers who looked at the supply and demand situation did not throw much cold water on the enthusiasm of the crowd. Projected growth by China and India along with the developing biofuels industry make it difficult to find fundamental factors that will bring prices down. The drastic shift in currency values make prices that are high for United States farmers more reasonable in countries that we export to. Twelve dollar soybeans look like eight dollar soybeans to buyers in other countries. They are not even close to the price they paid in 2004, the last time soybean prices reached $10.
The only fear factor I see on the horizon is the overbought situation brought on by fund traders. At some point, the price will get too high and they will sell. When that happens, the door will not be big enough for everyone to exit. It will be ugly. However, in looking at outside markets like energies and precious metals, even a drop from lofty levels did not last long or go down as far as they could have.
If you are afraid of a disaster but like the thought of being on board for a possible run to $15, selling cash beans between $10 and $11 and buying a call option limits your risk. Options are expensive. If you consider a March call option for 60 cents with futures at $12, the cost is five percent. Several years ago with futures at $5 a call would have to be 25 cents to be comparably priced. When option prices are high, opportunities are great. In the bull market of 2004, I paid as much as 80 cents for at-the-money calls and still profited from the trade.