Roy Smith: Time for a break
A very well attended options workshop in Dodge Nebraska on Wednesday marked the end of my winter season of meetings for 2008. The only thing I have left on my calendar is a meeting with a bankers group on April 3. One of the things I had on my program at some of the winter meetings was an illustration of how the biofuels demand and currency exchange rates are putting a floor under prices much higher than anything we have experienced in previous years.
I said that prices could fall 20 percent and still be historically high. During the month of March soybean prices have fallen roughly 15 percent and corn futures prices have dropped roughly 12 percent. That is not quite the 20 percent I alluded to but that may come next week. Prices on the close Thursday took soybean prices back only to where they were at the end of December. Corn futures are now back where they were in late January. From a historical perspective things do not look so bleak.
One of the advantages of being an old guy is that I can remember instances of similar price action earlier in my farming experience. The first two weeks of December, 1980 soybean futures dropped 25 percent in seven trading days. Corn futures dropped 14 percent in the same time period. Before long prices had rallied to gain back half of what they lost during that fateful seven days. There was no more opportunity to sell $10 beans, but there were opportunities to sell at prices higher than where the bullish run started.
The big unknown in the market as I see it is how long the liquidation of the long speculators will last. The market will be driven by traders being forced out by massive margin calls until that ends. On the other hand, the liquidity of grain buyers should improve as prices drop. Most farmers forget that margin calls work both ways. Every fifty cent price per bushel drop means more available cash for a grain buyer that has been buying cash grain and hedging it. Those funds can be sent back to the company and used to pay off notes that were taken out to meet margin calls.
It is tough for farmers to keep things in perspective in times like this. One approach is to look at the price level currently offered and sell if it meets cash flow and equity goals. In most circumstances the prices offered should compare favorably with expectations as the crop was harvested last fall. A second approach is to wait for the retracement that is almost sure to come. The key work here is almost, because no one can say for sure that the overall economic situation will not pull prices lower than if it were simply a problem with grains. The third possibility is to assume that the bullish fundamentals will regain control of the market and the bullish trend will resume. The last approach has the potential for the greatest return. In my opinion it also has the potential for being a complete failure.
I am glad this is a three day weekend. This afternoon I am going to cut trees out of fence rows. Cutting wood in the spring is the way I get in shape for the busy planting season. It also takes my mind off the markets. I look forward to spending some quality time on Sunday with the grandkids. They help me keep grain markets in perspective. They have no interest in the price of soybeans!