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Senior Contributor

Excellent Article On Where US Economy & Asset Prices Are Heading

https://www.zerohedge.com/news/2018-09-23/roberts-we-are-near-point-where-rates-will-matter

 

This is an excellent article that ties together aspects of the US economy, tariffs, budget deficits and Federal Reserve tightening, and their corresponding affect on equity and bond prices. While the conclusion is that the US economy is a lot closer to slowing that is commonly thought, and therefore this is a very good time to buy bonds, there is a further implication for corn and other commodity prices. Perhaps not all that pertinent for the present harvest, this article can provide some very good insights on how you should be approaching your plans for 2019. For if you knew that US consumer demand would be falling in 2019, perhaps it might be a good idea to sell forward your 2019 at today's prices, so that if the economy does fall off the proverbial cliff and consumer demand slackens, resulting in lower prices for grains and meats, you will still be locked into sales made before the fall.

 

For all its worth, I happen to agree with the findings of the author of the article contained in the link above. My feeling is that starting in 2019 and at least through 2020, the risk to the US and global economy remain tilted toward slowdown. This pause that refreshes may be exacerbated by any negative wealth effects of a stock market correction that winds up being larger than historically typical. Such an over-sized correction certainly can happen considering much of the run up in stock prices this year was not fueled by increased profitability of companies but rather by the effects of companies investing the windfall benefits of Trump's tax bill by buying in some of their own company's outstanding stock. One-off price effects like that, which occur with little market breadth or participation, are typically reversed quickly when a market reverses, and the resultant price reversal becomes more pronounced that ordinarily would be attained during a market correction.

 

Accordingly, during the next few months I would look to sell into any commodity price rallies for contract deliveries in 2019 and 2020. I wouldn't be selling the ranch, but just enough so that if the slowdown occurs, I have enough sales at today's prices so as to cushion the negative effects that will occur if prices drop by 15-20% when 2019 and 2020 arrive and I am then selling the remainder of my inventory. 

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71 Replies
Honored Advisor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

For about 50% of producers you are advocating locking in a loss.

Ever try to sell that to a banker? Wife?

What a business plan...
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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

One of the first rules of investment I learned long ago is an adage that says "The first loss is the cheapest". 

 

May 19 Corn Futures settled at $3.7725 on Friday, which is just about what the average price for corn has been for the last year or more. So if half the corn farmers have been taking a loss at this level for the last few years, I think they have a bigger problem than the price. 

 

The question is rather simple : in light of corn's recent price history and the factors presently influencing the direction of the US and global economies, is it worth the risk of hoping for higher prices in exchange for settling for lower prices should the hopes not pan out ? From a risk/reward perspective, it seems to me that it would be prudent to hedge now some of the 2019 inventory than to roll the dice and perhaps have to settle for a significantly lower price for all of your 2019 inventory should the economy tumble in 2019. 

 

I think most bankers would agree. I don't know about wives, that might be a different story with a whole different set of risk/reward dynamics.

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Honored Advisor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Bottom third marketing?
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Honored Advisor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

And buy a call now to protect yourself?    Just in case you`re wrong.

 

If we have low $3 corn and $7 beans, there will be farmers throwing in the towel after winter sitdowns with bankers.  Probably most being willing liquidating after hearing the quick course on what "burning equity" really entails.

 

I`m not saying it to be provocative, but it wouldn`t surprise me to see 1/5th throwing in the towel and some of the fringe that goes to the PNW laying ground fallow.

 

Hope I`m wrong because that could cascade  and effect everyone.

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Veteran Advisor

Re: there are folks who did sell all their corn in 2018 at $4 and over

That opportunity was early in the season.

 

and some actually sold over their aph so turned to be a great hedge.

 

so far though it it's the season of doldrums soo perhaps a bunch of longs / corn buys are now prudent.

 

near history is always market precedent thus there should easy be the $4 corn sale opportunity in 2019 also.

 

i really think the " sky is falling " crap being spun is just that...CRAP.

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Honored Advisor

Re: there are folks who did sell all their corn in 2018 at $4 and over

The problem with talking the hindsight of "$4 corn" was after a 40 to 50 cent basis, it wasn`t available...here anyway.  I think the best price offered at a coop for this crop of corn was $3.70 and maybe $3.85 at the feedmill or e-plant and that was offered during planting delays, 20th of May and many hadn`t turned a wheel.

 

So to play the game of "Why didn`t you sell????" and of course the alternative of "So why did you sell so early, didn`t you know a drought was coming???? Geesh!  What were you thinking??   you had your chance!".   People that say that is a mark of someone that doesn`t have skin in the game....I`m not saying they are bad people, just never stood in the machine shed full of boxes of seedcorn and the rain falling down and the tractor and planter shutdown next to a field pond. 

 

There are reasons for optimism, but we had a big carryover and supposedly "this" is a big crop coming, interest rates rising, there is a time for calculated realism and this is it.   I think we might get "$4 corn" but that means an honest $3.60 corn F.O.B from the farm and beans whatever similar and we`ll be chastised if we don`t take that "$3.60 corn in that 30 hour stretch next April when it`s offered.  

Honored Advisor

Re: there are folks who did sell all their corn in 2018 at $4 and over

Bottom third marketing..................ray-gold......has a nice ring to it. Smiley Wink

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Senior Contributor

Re: there are folks who did sell all their corn in 2018 at $4 and over

Notice that every peak in price since 2012 has been progressively lower, with the last two at $439.35 and then $412.25. This tells me that the next peak will not reach $4.00, so the complacency of thinking $4 will be attained easily may be a lethal miscalculation. 

 

You are correct that earlier this year was a great ti e to hedge, but regrettably hindsight is 20-20. The economic landscape and corn markets did not provide the kinds of signs then as they do now that hedging future production was called for. So we have to think about what to do now, because its the future that can bring us injury, not the past.

 

No the sky is not falling, but the global economy is due for a pretty good sized recession, and we are starting to see some pretty clear warning signs that the time for such is near. That's why I posted the link to the article at the top of this thread. We are near a critical turning point, and those are the most important times to take heed of what the signals are saying to you. 

 

Which is why I think it prudent now to take some insurance against future inventory. 

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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

The way to hedge being wrong about the hedge is by making the initial hedge only a small portion of your expected 2019 inventory. No more than 20-25%. Leaves you room so that if prices go higher you have room to hedge more at the higher prices. The chance of seeing $4 again is small, so if you're in at between $3.75 and $4, you have little margin to be wrong. 

 

And don't forget, you can get in and out of a futures contract hedge most of every day and night, so if the conditions change and it looks like prices could go higher, you can get out of some or all of the hedge. For example, I am expecting that the double top formation in December Futures will be satisfied down at $3.29, and then there could be a pretty substantial bounce back to the $3.70 area. So depending what the economic landscape looks like when corn reaches $3.29, I might say its time to take some of the hedge off and look to re-establish at a higher price on the expected bounce. 

 

The whole point is that right now the market is telling me to protect against falling prices. What happens tomorrow will be dealt with tomorrow, so the second point is to stay flexible and diligent. Managing the sale of inventory is almost as important as producing it, so devote the time and you will be rewarded.

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