Watching the Market Rebalancing Act
If you are a corn or bean producer, the recent washout in prices over the last two months has been devastating. When prices go down, even if you are strongly marketed, it may seem you never have enough sold or hedged. It is the nature of prices to slide from higher levels when the market perceives increased supply. Ironically, the livestock market has had the opposite trend in value the last year (in particular the last three months) in which hogs, cattle, feeder cattle, and dairy have all punched into new contract highs.
The old saying is, "Low prices cure low prices, and high prices cure high prices." Another way to interpret this is the generalized belief that markets will rebalance themselves over time. Variables affect supply and demand, and as these are factored in, prices move. Typically, supply shortages lead to sharp rallies in a market, especially if there's something like weather that comes into play quickly. This would be called a supply shock. The drought of 2012 is an example in which prices that year went from low to high from June to August, a very short period of time. Longer term trends (such as a bull market that the cattle futures has experienced) are due to supply issues and sometimes increased demand. Both factors have affected the livestock market over the last couple of years. Livestock has a longer product cycle than grains, which means it takes longer to build or liquidate supply. Therefore, tight supplies can lead to multiyear bull markets. As the herd grows, if demand can't keep up, you'll also see prices slide for a number of years.
If you were to look back three years ago, you would see incredibly tight grain supplies, and this led to high prices. Livestock prices were much lower than they are today, and the high grain markets led to a contraction in the livestock industry. Consequently, tighter supply numbers eventually caught up to the market and are now factored in through higher prices. Expect livestock prices to eventually move lower as herds build. Grain prices will experience growing demand at lower prices. Weather will have a big impact on price direction as well. The most likely scenario is that over the next three to five years, grain prices will stabilize with corn likely trading between $3.50 and $5.50 a bushel; livestock will lose ground from the current record-high levels, and hogs will likely trade between $85.00 and $115.00; live cattle will likely trade between $115.00 and $145.00. The rebalancing act is underway!
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