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Market procrastination can cost you-Roy Smith
Some days I find it difficult to find something to write about. Not so today! The problem this week is in knowing what to leave out. I will start out with the simple stuff. I finished planting corn Wednesday afternoon. That is not a big accomplishment considering the small size of my farm. Nonetheless, it is a relief to have that job finished on May 4. My sympathies go out to those farmers waiting for some dry weather. I feel for those of you in the Mississippi flood plain. The Missouri River is right at flood stage in eastern Nebraska. I do not expect to be completely spared from flooding. If things go well, I will start planting soybeans today.
I had some corn hedged from April 2010. It was rolled from a December 2010 futures contract into a July 2011 futures contract after last year’s harvest. One of my goals was to buy back the futures and sell cash when the basis hit -.40 by June of this year. When I rolled from December to July the basis was -.91. Last week the basis for June delivery got to -.39. The last 11 cents of the move was in the last month. With such a big move in such a short time, it was tempting to wait for more. However, I know from bitter experience that it is best to follow my plan, so I made the transaction Monday morning. When the markets closed on Monday, the basis was back to -.42. Procrastination would have cost me three cents. In total, hedging the corn was a big loser. However, the basis play was good for 51 cents, the difference in basis between November 1 and May 2.
From price action this week, it appears that last week’s moves may in fact been the beginning of a “crash”. I thought that the description was pre-mature when grain prices last Friday got back all they lost on Thursday. Today, it is looking like the move up last Friday was only a bounce. The pull back yesterday was pretty much across the board in almost all commodities. Those commodities that had gained the most in recent weeks lost the most yesterday. Commentary on commodity pages yesterday talked about speculative money leaving commodities. Precious metals, energy futures and cotton all experienced liquidation. I wonder where that money is going. It is difficult to think that it is going into bonds or CD’s with interest rates near zero.
Also on the marketing page commentary columns is the supposition that interest rates will begin rising near the end of the year. I realize that low rates are good for businesses that borrow money, such as farmers. I am involved in two non-profit organizations that rely on interest for operating money. Low rates are killing these organizations. Surely, there is a middle ground between almost zero and the killer interest of the 1980’s! With all of the common folks who think that government deficit spending will cause inflation and interest rates to rise, when interest rates finally do increase, the increase may come with a vengeance.
These are interesting times. Sometimes boring is better. I enjoy selling corn for $7 per bushel. I do not enjoy paying $109.68 per acre for seed corn. I enjoy operating good machinery. When I watch my neighbor install a guidance system on his 12 row planter with interplant, I feel like technology has passed me by. When prices drop like they did yesterday, it makes me glad I am no longer in the expansion phase of my business. Somewhere, some time all of these interesting factors are going to come together and there is going to be a big correction. I plan to be one of those left standing when it happens. Those who are quick to adapt to change will survive. Those slow to act will have a tougher time.