Time to give thanks
It's Turkey Day this week, time to give thanks for all the things we have and to have a joyful heart. Farmers have a lot to be thankful for over the past year, with the highest prices ever for commodities this spring/summer that gave us some tremendous opportunities to get something sold for this year. Many producers took advantage of that, making at least some sales of 2008 crop at some great prices, while others made substantial sales (not only 2008 but 2009 through 2011 crops as well). The more you sold, the more you have to be thankful for!
A lot of those sales opportunities are gone for 2008 crop, but opportunities always come along again. Is $4.50 corn for 2011 a reasonable offer, especially after dropping $2.50 recently? Is $3.50 a reasonable offer for 2008 corn crops?
Currently, the rapid decline in input prices (crude oil, fertilizer, etc) is also a major beneficial development for agriculture. The 65% decline in energy costs has been well publicized, but the rapid decline in fertilizer prices has also been astounding. While local gas pump prices have dropped significantly, if gas declined like the futures market (down 65%), prices would be even lower at the pump. This indicates to Pro Ag that even more decline is expected in input costs -- even at terminal locations. At local supply stores, some quotes are still quite a bit above the market as they've simply not had time to drop as much or as fast as the futures markets. Who could have imagined a situation where input costs could decline 65% in just four months? That wasn't on anyone's itinerary, but it is now a fact in energy costs.
Fertilizer is in the process of dropping significantly as well, and although seed producers make a passionate case for why seed prices can't drop it would be hard to imagine a scenario where they won't.
The impact on the production factory of farmers worldwide is expected to be sizable of this recent price drop. Just when we got farmers excited about being in production agriculture again, we are pounding prices lower and drowning out any incentive to increase production in 2009. Already private firms are forecasting a reduction of five percent or more in world wheat planted acreage, and also a reduction in South American planted acreage of corn and soybeans. It is simply not reasonable to expect producers to keep expanding with a 50% cut in product prices in just four months.
The trick is figuring out where it all settles out. There is an adjustment process being completed for all costs and product prices, with the U.S. economy the huge pendulum hanging over all prices of commodities and input costs today. Expectations by the world's economic decision makers is for continued stress on all sectors, and further economic malaise in the U.S. and world.
Prices have stabilized recently, with the stock market reversing higher Friday in a dramatic upside reversal after testing lows. Stocks rose 12% in two days, the largest two-day rally since 1987's stock market crash. Jan soybeans formed a double bottom at $8.38 last Friday, with 5 weeks separating the lows which is beginning to look like a solid short term bottom. Wheat also had a double bottom formation (although not as perfectly formed as soybeans since prices were a few cents lower Friday than the October lows). The dollar reversed lower, and gold rallied significantly. Can we be at a bottom? Or are there more difficulties ahead? At least now if you want to be bullish, the risk is defined in a purchase down to the old lows.