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Watching the Market Rebalancing Act

07/11/2014 @ 10:30am

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!


If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129. Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this is sent on behalf of the company or companies providing the services discussed here.

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