The market faÃ§ade
It seems like decades ago that corn prices were $2.40 futures, $3 wheat, and $5 soybeans but actually that was only 2 years ago!
The $30 crude priice was kissed goodbye a year earlier, and now it seems like the market is just a blurr going by, a faÃ§ade which we are trying to figure out is real or just an image that we didn't completely have in focus. Fertilizer prices definitely feel like that, with prices going to 300-400% of just a few year's ago prices. Fertilizer suppliers seem to think their fantasyland of 50%+ price increases year after year are going to be the norm now based on the way they want to charge for 2009 supplies. It's like they haven't even noticed crude oil has dropped over 20% in the past few weeks!
But fertilizer dealers/manufacturers will soon learn a lesson that wheat producers (and recently crude oil/corn producers) also quickly learned - that what goes up can come down! The faÃ§ade of ever increasing prices has been etched into everyone's minds during the past two-year rally. It's going to be important for producers to forget about the past two years, and start focusing on the next 2-5 years instead. What worked the past two years may be certain to fail in the future.
Facts are that profit margins for corn/soybean/wheat farmers are as good as they've ever been (much like fertilizer profit margins). Whenever there is a lot of money in something, usually competition arrives and drives some of the profit out of the marketplace. At Pro Ag, we are starting to wonder if we should sell back our pre-bought fertilizer supplies at prices dealers want to sell to us next year, essentially taking the profit and pocketing it. Then turn around and lock in $6+ corn from 2008-2011! Clearly some serious money could be made in agriculture the next few years!
Grain prices have rallied back up to where you can once again consider selling corn, soybeans, and wheat again. Corn is still the darling child, bidding $5.70 Dec08 this morning, and $6+ futures for 2009, 2010, and 2011. It's probably time to start locking in multiple year hedges as it's now likely the US could have a record large 2008 crop. It's raining in all the right places in the Corn Belt (western Corn Belt, HRW and HRS areas) and staying dry in all the other soggy places (ILL, IND, IA, OH, MO, MI). Temps are moderate, allowing especially the southern areas additional time to fill grain in what usually is an area that burns up this time of year. Overall, weather remains favorable and we expect the actual corn yield potential is closer to 158 than USDA's recent estimate of 155 (which many think is too high.).
Soybean yields are also likely to be much higher than forecast, especially considering USDA's surprising drop in yield estimates this Tuesday (down 1.1 bu from July's forecast). Pro Ag yield model estimates are over 3 bu above USDA numbers, a scary thought considering we have only a few months for USDA to revise it upward.