2013 'pivotal' for ag markets -- analyst
“It’s a pivotal year for commodities,” Dan Basse of AgResource Company told the crowd at the annual National Broker Meeting sponsored by ADM Investor Services (ADMIS) in Chicago this weekend.
“The world has ‘destocked,’ and we continue to face volatility caused by the drought and the financial situation. We’re at the lowest stocks-to-use ratio for corn that we have seen since 1974. That means there is no room for anything but normal weather.”
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Basse said that there is no evidence that world grain trade or consumption will decline anything close to what is being purported by USDA. Additional domestic demand rationing is required in the U.S., he says, and in the regions of the world where destocking has taken place – namely the Black Sea, the European Union, and India - rising prices could lead to regional alarm.
Basse described the cash grain markets as “hot,” leading bullishness for corn into April. He said U.S. 2012/13 corn supplies will be down 1.9 to 2.1 billion bushels from last year, at their smallest level since 1995-96.
As he made the case for a potential pivot, Basse said that normal weather and a good crop in 2013 would kill the agflation story for a while, and corn could drop to $4.00 as the U.S. tries to buy back export volume.
“Corn could be $4 or $9 in 2013,” he said. “It all depends on weather.”
Each speaker at the annual meeting, which was attended by 220 brokers from the firms who clear trades through ADMIS, reiterated the unprecedented brink on which the agricultural markets stand right now, all pegging weather as the catalyst for determining which price scenario will play out in 2013.
“We’ve never had to deal with such uncertainty – there are so many hurdles we have to get over this year,” said Steve Freed, vice president of research for ADM Investor Services.
The CME Group has reported that full-year 2012 volume was down 15% from 2011, and some marketing service firms, such as Stewart-Peterson in West Bend, Wisconsin, report complacency among farmers who are bullish on 2013 grain prices.
“Assuming that weather will provide higher pricing opportunities in the future is a major risk,” says Stewart-Peterson’s Bryan Doherty. “And then there are those producers who manage to do some marketing, and don’t commit enough to make much of a difference. In these weeks before planting, farmers need to be challenging themselves to learn as much as they can.”
In a spirited presentation, David Hightower, president of The Hightower Report, said it is time to “open your mind to possibilities and prepare strategies for a volatile price environment.”
“Get your farm clients prepared,” he emphasized. “I would play this as if there’s going to be another drought. The probability of this happening is not very good, but the ramifications of it happening are greater than anything we’ve ever seen.”
Hightower painted an example of how the market could swing: “At first the market could leap to the conclusion that there is no drought, and at that point demand will lurch forward and all those countries destocking are going to restock.”
He urged brokers and their farmer clients to “get out of your comfort zone and do something. If you’re a hedger, buy puts. Show people how to use spreads. You can approach these markets without fear. Your confidence will come from knowing and understanding the strategies.”
Although each speaker expressed concerns about Washington brinksmanship, unbridled spending, and loose fiscal policy in the U.S., Hightower downplayed pessimism, saying it was bred by news media. Instead, he encouraged optimism that comes from a global perspective.
“Don’t have 300 millionitis (U.S. population). Don’t make your decisions based on the U.S. alone.”
Both Hightower and Basse point to China as a reason for optimism. Hightower described how China has moved to get its economy under control after a brief tightening, and predicted decades of consumption ahead within that country.
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"China currently consumes one half of the pork in the world. And just over a year ago, China surpassed the U.S. as the world’s largest automobile purchaser," he said. “If you can buy a car, you can buy a piece of meat.”
With enthusiasm for the cattle market, he added, “Five years from now the amount of beef exports will amaze us. That’s because protein is prosperity.”
As the agricultural complex is poised to experience unprecedented risk and opportunity, Tom Kadlec, president of ADM Investor Services, both opened and closed the annual meeting with measured optimism. “Be rational in your approach to the markets,” he advised. “We must lead the futures industry with integrity and transparency.”
ADM Investor Services is a separate and wholly-owned subsidiary of Archer Daniels Midland Company. Currently, Futures magazine lists ADMIS as the 12th largest futures commission merchant (FCM) in terms of customer equity. Approximately 200 introducing brokerage firms clear trades through ADMIS, many of whom specialize in serving American farmers.
Editor's Note: Angie Molkentin is a freelance contributor for Agriculture.com and Successful Farming magazine.