Fool me once...shame on who?
The old saying goes "Fool me once, shame on you. Fool me twice, shame on me!". This is very fitting for marketers today (who have already missed the wheat sale boat), and for those policymakers in the ag community who are dealing with CRP issues today.
First of all, on the market side this week we have seen the first evidence of a top in corn/bean markets (the wheat ship sailed in February!), with soybeans dropping $1.50 in 48 hours and corn dropping $.75. We have recovered from the worst losses so far this week, but it certainly opens up a whole new realm of possibilities in a marketplace that the past 22 months only included "up" in the list of possibilities. If we can drop $1.50 soybeans and .75 corn in just 2 days, can we drop $5 soybeans and $3 corn by harvest? After all, there is at least 40 days of trading in soybeans until harvest, and 60-80 days of trading for corn into harvest. We'd need to average a 10c loss in soybeans/day and only a 5c loss in corn to make these potential lows of $4.5-$5 corn and $10 soybeans this fall.
While these numbers seem shockingly low compared to current $7-$7.50 corn and $15-$16 soybeans, these are still profitable levels for production of both in the US this year - even with a sharp hike in production input costs.
Now there is a reason prices hit $8 corn and $16.50 soybeans - the grain S/D is remarkably bullish (and even more so by policy decisions thus far - but that is the second part of this week's column). Pro Ag is NOT in the camp of those who think prices will return to $2 corn and $5 soybeans - instead we think corn will trade $4-$7 and soybeans $10-$15 the next 2-5 years. This will leave agriculture VERY profitable the next 2-5 years, but the difference between profitability at $7 corn vs. $4 corn is a huge difference! Pro Ag would prefer to be on the high end of these sales levels - therefore our aggressive sales campaign lately since we got above $6 corn and $15 soybeans. These have been our multi-year (and even multi- decade) price targets since this rally began, and its time to now lock in at least some of these levels while we can. (NOTE: 2008 was there, but also 2009 and 2010 new crop the past few weeks. Add 2011 soybeans recently at the $14.50-15 level!).
All this at a time when most buyers won't give you a bid beyond 6 months. There is a reason buyers are willing to pay that much 3 years out, and its because they find no willing sellers anymore. That's the perfect time to do what my wise father called "walking when everyone ran, and running when everyone walked". Pro Ag thinks its time to lock up these multi-year hedges at ungodly profitability levels - and let the cards fall where they may. If we have capital to hold these hedges (and any bank should provide it), we can't see what could derail us as we don't even need a viable (read this as non-bankrupt grain buyer) outlet for this grain as we are doing our OWN hedging now. And the beauty of that is IF corn drops $3 and soybeans $5 the next 2-4 months, we can remove these hedges and use all that capital from our hedges (note this is the opposite situation of margin calls!!!) the next few years instead of letting our buyers have it all. Which reminds me of another of my father's wise sayings: "When the cookie plate comes around in business, don't be afraid to take two!"