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Can markets repeat in 2013?

11/01/2012 @ 1:47pm

Who would have believed December corn would top at $8.49? November soybeans at $17.89? Or December wheat at $9.64? But it gives us a lot to talk about and ideas to ponder. There are any number of reasons why we have seen price spikes in our products over the last few years. And, to a large degree, the way we trade and the way the trade responds has changed 100% from even 10 years ago. Following is a summary of where we've been and why, and a brief explanation of where I think we're going.

The Bottom Line

For a long time at the CBOT, corn was referred to as the inflation-proof product. While there were more and more bushels per acre, any serious price rise was stifled since supply was usually out in front of demand. The large seed companies were marketing drought- and deluge-proof seeds. Nothing would stand in front of supply. While trend line yields were, for the most part, being met slowly but surely, population and demand were catching up to technology. That is the bottom line with commodities. The arithmetic line of technology vs. the steeper population growth line of the world. Simply put, we need more food. Demand has approached and overtaken technology. We will run out of corn before we run out of crude oil. T. Boone Pickens needs to talk about peak corn, not peak oil. The U.S. farmer runs as efficiently as possible. Global growth will need to come mainly from other countries.

The Federal Reserve (Fed) is well fed and watered.

Things spiked this year because of real demand, a horrendous drought, and a Fed that wants to print dollars until the ink runs out. Demand won't change, and if it does, it's going higher. The Fed isn't going to stop anytime soon. Those two inputs will help to keep us at our higher levels longer.

Going Forward?

The old adage, “You won't go broke taking a profit,” is just that – an old adage. You can leave way too much on the table.

There has never been a more punishing time in the markets when you get things wrong. Don't be greedy. Be keenly aware of what is happening around you. Is there a cash rent spike or a land price spike? What is happening to exports and the dollar? What does your gut tell you about what you have out there and what everyone else has out there? Do the best you can to hedge those risks without getting greedy.

A wise old trader once told me that the way to make money was to respect the market like a steamroller running over nickels and dimes. Stand in front of it and take what it lets you take. If you become too greedy, it will roll over your hands, and you will never pick up a coin again.

That mind-set still holds true today, and it's a good way to run your business. Interest rates are ridiculously low. If you get too leveraged, the interest rate on your debt puts you out of business. Keep things close to the vest, and use your common sense. That is a skill sorely missing in today's world, especially on the trading floor.

The markets are faced with real sustained growing demand. A cheaper U.S. dollar and supply-line interruptions are the reasons we're at these price levels today. These inputs won't change anytime soon. Commodities are here to stay.

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