For my first column in Delta Farm Press, there is certainly is no lack of topics to discuss. Farming and marketing are more complex than ever before. Some key fundamentals impacting commodity prices today barely existed five years ago:
- Volatile energy prices
Crude oil prices have completed the longest bull market in history, peaking this past July. Since then prices have crumbled from $80 a barrel to under $60 — and within the next six months, barring a catastrophe in the Middle East, I believe the number will start with a 4. Energy prices are in the midst of a long-term bear market and this is not an item you need to be buying in advance.
- The ethanol and bio-diesel industry
The bio-fuels industry is changing the face of rural America. This year more corn will be crushed in ethanol plants than exported. By next year, nearly 30 percent of the corn produced will go into ethanol. Oil seeds are not to that stage, but the biodiesel industry is picking up steam fast.
- Asian rust
Thus far an overblown concern. The problem has been so widely anticipated that scientists at major chemical companies have developed the means to keep this deadly disease under control. While always lurking on the sideline as a possible production risk, my guess is that we will never see a widespread outbreak of Asian rust in this country.
- Commodity funds are in power
A great deal of money has flowed into commodity funds in recent years. Going from under $40 billion only six years ago, there's now over $140 billion in commodity funds. While the majority of this money is committed to the energy markets, a significant sum also goes to grains.
- Electronic trading
While not high on the radar screen of most producers, in September the Chicago Board of Trade started trading electronically, side-by-side, with open pit outcry. My guess is that within a year pit trading will no longer exist at the Chicago Board of Trade. Electronic trading is resulting in increased volume, lower cost of doing business and thus also increasing volatility.
Note of bullish caution
Most everything mentioned above is bullish corn, soybeans and wheat. Without going into significant details in this first column, keep in mind that market prices are anticipatory, in which case they discount known fundamentals. A key question — will improvements in genetics that are increasing corn yields offset the increase usage in ethanol plants? In other words, is it possible that production technology will keep up with the demand and the major bull market that many are anticipating will not occur?
The bottom line
Be careful about being overly bullish in commodity prices over the months ahead. The energy market has already proven that what goes up will come down — and fast. The same will happen in the grain markets — it's only a question of when, not if. The market has been showing that the world has a shortage of $2 corn — but do we have a shortage of $3.50 corn? We also have a shortage of $5 soybeans — but do we have a shortage of $6 soybeans?
Since this is my first column for Delta Farm Press and while I know many of you have read our newsletter, The Brock Report, for many years, to some of you this information and my approach will be very new. What I will not attempt to do in this column is to predict where soybean and cotton prices are going to be in the short or intermediate term.
A farm magazine, with lag time, is not the media to be a short-term price forecaster or give advice on such. It is a media, however, by which I hope to:
- Present ideas to make you think about marketing in a way you have not in the past.
- Provide you with a new insight to aid in you decision making process.
- Discuss topics less frequently covered in farm magazines, such as the energy markets, the general economy, interest rates, and commodity funds.
Most importantly, what I hope to in this column is to stimulate your thinking so that marketing becomes more fun and profitable for your farming operation.