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Speculative Commodities
Bubble? Or Not?
by Ed Usset
Grain Marketing Specialist – University of Minnesota
Nearly five months into the commodity crash of 2008, many different
commodities are trading at prices lower than three years ago, but not
corn, soybeans and wheat.
For example, light sweet crude was $60 in November 2005 and is now
around $50. ICE Cotton No. 2 was 50¢/lb. back then, and is now 44¢.
Copper was $2/lb. in 2005 and is now $1.65. In that same time frame,
corn has gone from $2 to $3.50/bu., soybeans have risen from $6 to
$9/bu. and wheat has increased from $3.80 to $6.35/bu.
My point is simple: While it appears that supply and demand are part of
the equation, ethanol has had a lasting impact on grain and oilseed
prices.
I’ve made the argument that increased ethanol production changed the
equation for supply and demand of all grains and oilseeds. Higher demand
for corn has increased the price of corn. Higher corn prices, in turn,
have increased corn production and decreased the number of acres
dedicated to other basic crops like wheat and soybeans.
Despite poor processing margins, ethanol production continues to expand
because the construction of new plants began in better times. Don’t
expect the pressure for more corn acres (and fewer acres for other
crops) to ease.
To this end, I don’t see it as a speculative bubble, because supply
and demand are part of the equation. But lets get back to the basics of
preharvest marketing.
As University of Minnesota grain marketing specialist, I have spent more
time listening to growers than doling out an upcoming market outlook. I
do that because I think growers need to start their marketing with a
different approach – one that doesn’t begin with the market
outlook.
Listening to producers, I have learned that very few had a plan to
improve their marketing results. So now I talk to them about minimizing
or eliminating mistakes made in grain marketing, which is one aspect I
write about in my book “Grain Marketing is Simple” (www.cffm.umn.edu/simple/).
Read on to learn more about my simple approach, and there’s a video at
the end of this newsletter where I talk through this approach to grain
marketing.
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Preharvest Marketing: Take
The Profit
Being a reluctant seller of grain before harvest is a
mistake. Granted, it won’t always work in your favor – nothing works
100% of the time.
I emphasize this basic preharvest selling mantra during my many talks to
growers across Minnesota every year, as well as in my book.
In the book, written in 2007, I talk about three reasons why I like
preharvest marketing. But one of these three – LDPs – has
disappeared. They were good a few years back, and helped many growers
gain price success, but they are passé now. So the big equally
important reasons to dig into when considering preharvest grain
marketing are:- Know your production costs.
- Watch for strong seasonal tendencies.
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Know Your Production
Costs
First, I always remind growers to follow common sense
and know their production costs, so they have a good idea of a
profitable selling price. If you have a handle on this, then you can
look for selling opportunities when prices exceed your production costs.
Granted, that doesn’t mean you need to sell 100% when the market is
2¢ over your production costs, but it means that you should sit up and
pay attention.
While arguments can be made about how much to sell at a modestly
profitable price, there should be little argument about the need to get
something sold when a good opportunity arises. Knowing your cost of
production and seeing a profitable price is reason alone to act.
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Pay Attention To Seasonal
Tendencies
Second, I remind growers to watch seasonal price
patterns in new-crop futures, because they often point to more favorable
pricing opportunities in the spring.
These seasonal price patterns are just tendencies – not a certainty
– as there are always exceptions. But these tendencies are pretty
strong if you look at the last 18 years.
In corn, eight of the last 10 years have resulted in lower new-crop
futures at harvest compared to the previous May. That’s a pretty darn
good tendency. In soybeans, the same thing has happened in seven of the
last 10 years. These tendencies – not certainties – should make
growers want to sit up and pay attention. And the drop in futures prices
we’ve seen this year is the biggest drop ever.
I always talk about crop insurance and how these revenue-based tools
really give great coverage if you’re wrong and the market goes higher.
And I also like to talk caution about selling more than 10-20% of your
grain in future years, like 2010 or 2011, because you’re making an
assumption on production costs, as well as crop rotation.
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Attitudes
Changing
I am happy to report that I see attitudes changing.
More and more producers are losing their reluctance and showing a
willingness to set a price before harvest. Low harvest prices make for
dreary headlines, but the good news is reserved for producers who take
early action at favorable prices. These producers are not just getting
by – they are enjoying great years.
Listen to Usset expand on this topic at cornandsoybeandigest.com/consistency_counts_asgrow.
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