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Commodity price losses good for farmers
Huge losses in grain markets have occurred in the past few weeks, with $1.50
losses in corn and $3 losses in soybeans sending shock waves throughout the agriculture community. Stock markets have been pummeled, including ag stocks such as
manufacturing and fertilizer stocks. These huge losses have everyone concerned
these days, most especially farmers who have been concerned that price gains
made recently will quickly evaporate, much like in 1996 when we endured
extremely low prices for 5 years or more following that price spike.
However, Pro Ag is not so certain that the recent break in commodity prices is
all bad for producers. First of all, the first fertilizer price declines in
years has come during the past month, with most fertilizer prices declining
rather sharply from the stratosphere. This could be an extremely positive
development for farmers, as the fertilizer demand has been fueled by the saying
that "the price is going up next week, so buy today". We've crammed 3 years of
fertilizer purchases in the last 2 years based on that mantra. Now that this
mantra is no longer true, it could be surprising how much fertilizer prices drop
in the next 6-12 months! In fact, fertilizer warehouses are crammed full of
fertilizer, and many producers don't need to purchase any fertilizer for the
next 12 months. Markets are ruthless at balancing supply and demand, and it
could be interesting how this balance will be retained over the coming year, but
for once, the farmers have the clear upper hand.
Fuel prices also have declined by about 25% or more, with crude oil down even
more percentage wise. These also are price declines which producers will
welcome. The cost of production for 2009 might be much smaller than producers
expected, with the first cost of production decline for inputs in years likely
the coming year. Since July, Pro Ag has been saying $6.50 corn might look much
better than we expect for 2009, 2010, and 2011 as the 25-50% annual hike in
input costs could very well have been ending (and with great fanfare). Sure
enough, the CRB index monthly downside reversal which we recognized in July said
volumes about future input costs!
With a decline in commodity prices, we are reminded of our new revenue price
insurance coverage, which was designed to protect producers from price declines
between February and harvest. February base prices for grains were $11.11 for
HRS wheat, $13.36 for soybeans, and $5.40 for corn. The harvest price for HRS
wheat was $9.11, or a 18% price decline from the base. In essence, that
increased the coverage level about 18% so that in effect a 70% revenue policy
became a 88% yield policy.
If corn futures average $4.30 (near current levels) during October, trigger
yield levels would be hiked by about 20% which is the percentage decline in
prices (from $5.40 to $4.30). 70% revenue coverage becomes 90% yield trigger
levels for claims. Better yet, 90% GRIP coverage becomes 110% effective yield
coverage on the average yield in the county (was GRIP the best choice in 2008,
especially for the best land in the county?) Soybean price declines have been
larger as if soybeans average around $9.70 (near current futures levels), we
will have a $3.66 decline or about 27% price decline. 70% RA revenue coverage
(CRC price coverage is limited to $3) becomes 97% yield triggers, and 90% GRIP
coverage becomes 112% yield triggers for losses (again limited to $3 price
changes)! It's very likely insurance companies will be paying some huge claims
on revenue soybean insurance in 2008 (especially GRIP), as the huge price
declines combined with disappointing northern Corn Belt harvest yields are a
perfect storm for ag producers (and the perfect nightmare for crop insurance
Imagine if those same producers were smart enough to sell 2008 soybeans for $15
or higher or $7 corn or higher, executing the 'double dip' into profits! For
GRIP producers, it's even possible to harvest record large yields on your own
farm, collect GRIP insurance proceeds (on the average county yield), and sell
the bountiful harvest at $15 soybeans, $7 corn, and $12 wheat!
Progressive Ag has a saying that in farming, when you recognize there is a pile
of money waiting to be picked up in marketing or farm business management, it's
a good idea to walk over and scoop up some of it. Revenue crop insurance
(especially 90% GRIP insurance) and crop sales this June was a perfect example
for applying this farm management principle. The very high February insurance
price levels ($11.11 wheat, $13.36 soybeans, and $5.40 corn) was the first
example of a pile of money waiting to be scooped up, and at the very least,
covering any and all risk for 2008 crop production. The second example was $15+
soybeans, $7+ corn, and $12+ wheat sales opportunities this spring/early summer
after your crop insurance safety net was established. Did you scoop up some of
this cash? If not, then you may be in need of additional guidance at
recognizing the pile of money when it does appear!
A month ago, Pro Ag mentioned that $4 corn and $10 beans may be waiting in the
wings for market bottoms this fall, with our targeted lows sometime in October.
We also mentioned that Pro Ag can turn bullish once these levels are hit. Well,
folks, those levels have been hit this week with $4.10 corn overnight Wednesday,
and $9.21 Nov. soybeans as well. Hopefully, bullish developments won't occur
until after the insurance prices are determined this month, but Pro Ag could
certainly turn bullish at the first bullish price signal as we are not in the
camp that expects prices to decline back to our old levels of $2 corn, $3 wheat,
and $5 soybeans. Was yesterday's upside reversal in corn the bullish signal we
were looking for?
The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable. The
opinions and recommendations contained are based on our judgement and do not
guarantee profits will be achieved or that losses will not be incurred.
Recommendations should not be construed as an offer to buy or sell
commodities. There is substantial risk of loss in trading futures and
options on futures.
Ray Grabanski is President of Progressive Ag, a marketing and risk
management firm for farmers located in Fargo, ND. For questions or
comments, or if you are interested in more information about Progressive Ag's
common sense marketing services, call 1-800-450-1404 or email
Huge losses in grain markets have occurred in the past few weeks, with $1.50 losses in corn and $3 losses in soybeans sending shock waves throughout the agriculture community. Stock markets have been pummeled, including ag stocks such as manufacturing and fertilizer stocks. These huge losses have everyone concerned these days, most especially farmers who have been concerned that price gains made recently will quickly evaporate, much like in 1996 when we endured extremely low prices for 5 years or more following that price spike.