Content ID

151409

The One-Big-Field Theory

The market reacts to the world’s output.

Last year, it’s farmers in the flood-ravaged areas of the upper Corn Belt, south-central Nebraska, midwest Brazil, and central Argentina. In 2015, farmers in western Indiana and parts of Ukraine were asking the same question.

The truth is, every year, somewhere in the Corn Belt and around the world, a group of farmers are looking at their poor crops and wondering why the market isn’t going up.

Those farmers in the Cornhusker state had too much heat last year year, then too much rain, and then too much heat (again) after pollination that caused corn ears to look like weightlifting barbells, among other malformations.

Meanwhile, neighboring farmers in Iowa recorded record-high yields from an unbelievably favorable crop-weather year in 2016.

In fact, some veteran farmers were quoted as saying, “It’s the best corn I’ve ever seen.”

In 2015, the Hoosier-state farmers mentioned previously watched heavy rains leach nitrogen from their fields, causing large reductions in yields. Argentina’s farmers had a great crop, right up until harvesttime, only to be hit with devastating crop damage from record flooding.

In the olden days, this was called backyarditis, a syndrome caused by gauging the market’s direction based upon how your crop looks outside your kitchen window.

One Big Field

Agronomists have pointed out a unique way to look at what kind of world crop will be produced. Consider the Corn Belt, and for that matter the world, as one big field.

Just as one field has various qualities within it (susceptible to flooding, higher quality soil, better drainage, or higher ground), so goes the one big field around the world.

Every year, somewhere, farmers experience either a drought, a flood, or a bumper crop. Every year, somewhere, damaging winds, hail, pests, or disease infestations can occur.

A good example was 2012; the worst drought in 56 years left a lot of bad spots in that one big U.S. field. Yet, the U.S. produced the third-largest corn crop ever.

John Bergeson, a crop consultant with Iowa-based Crop Production Services, agrees that farmers need to factor the one-big-field theory into their grain marketing plans.

“I think it’s even bigger than the Corn Belt. With the markets we are playing in today, it’s a global market. We’re not playing in a market in just the state of Iowa or in Polk County, Iowa,” Bergeson says. “What happens in Argentina, Brazil, China, and elsewhere affects us as much as what happens 2 miles down the road.”

Bergeson adds, “When I first got in the crop consulting business, it was all about what was going on in your county or town. That market isn’t there today. It’s a global market. And farmers need to be looking at those factors and figuring them into their grain marketing mentality.”

Crop Assumptions vs. The Markets

Guess what else views the world as one big field: the trade. If someone makes an assumption about the quality of his or her crops and potential yields, with the idea that this is going to create a leg up on the market, it’s the beginning of a failed thought process, according to Ben Wiginton, business development manager at Indiana-based AgYield.

“Even if you take a 3,000- to 4,000-acre-size farmer and look at his acres, in the grand scheme of things, he is still a small portion of the entire U.S. crop production,” Wiginton says. Jim Meade, a farmer from Iowa City, Iowa, admits getting caught up in that ‘out our back window’ view. “We extrapolate what we see locally to mean that is what must be going on elsewhere, or at least we flavor our observations that way.”

When the market acts counter to what a grower is seeing, he may take issue with the market. There is a problem with the assumption that the market should reflect the farmer’s crop conditions, says the longtime Chicago Board of Trade floor trader.

Why?

“Because the market is the market. If it were supposed to be performing some other way, there would be a lot more sellers selling or buyers buying. That is a tough lesson to learn,” Wiginton says. A great market speculator, Jesse Livermore, once said, “The market is never wrong – only your perception of it is.”

“That gets back to a grower trying to outguess and understand why the market is doing what it’s doing compared with his crop’s appearance outside of his kitchen window,” Wiginton says.

One Big Field, Globally

The U.S. grain market has been the global benchmark for years. Yet, that one-big-field theory stretches beyond the U.S. borders.

We have an incredible amount of information hitting the farm markets at all times. Whether it’s thousands of elevators, thousands of farmers, billions of dollars of investment money, or information on how these parties from around the world are using the market, it all impacts price fluctuations.

“Trade in the idea of concerning yourself with price. Instead, focus on profitability and preparation. As a result, you are going to run a much better farm operation. Even more so now: Because of the global atmosphere we’re farming in, world grain buyers are constantly looking for the value in commodities,” Wiginton says.

For instance, in early 2016, South American farmers were getting rich: As the Brazilian real currency was getting hammered, they were selling their low-cost soybeans on the export market, Wiginton says.

Trying to guess market price, based on any known information, is delusional, he says. In the short-term, there are a lot of things that can drive these farm markets that can supersede any fundamentals. “Trying to predict where the market is going to go, based on information that everyone has, doesn’t work,” Wiginton says.

Industry’s Bad Habit

As a grain industry, some believe there is too much talk about the things that farmers can’t control. Those things are price, yield, and weather.

“At the end of the day, your production has a negligible effect,” Wiginton says. “But, we talk about it – analysts talk about it. Why? Because we are trying to figure out stocks/use ratios, what the carryouts could be like.”

Finding out in which areas the farm operation is profitable, addressing problems proactively, makes for a much better operation, Wiginton says.

Traditional Grain Cycle

For many years, the U.S. planting season, pollination, and harvest activity controlled the market psychology. But now, we have the same information over the winter, based upon the South American crop.

“And that information comes to the market quicker than ever before. So, a farmer’s best opportunities may come at a period other than the U.S. growing season. If you’re not prepared for that price opportunity, you’ll miss it,” Wiginton says.

For instance, in 2016, the managed money investors ran up the corn market on a crop-weather problem in South America. “Hopefully, farmers sold. When the U.S. production looked more secure, the rally was over. The first 65¢ drop in four days cost a farmer producing 100,000 bushels per year as much as $65,000,” Wiginton says.

 

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