Excellent Article On Where US Economy & Asset Prices Are Heading

[deasmatt90]

Nutlug I see your point. However it doesn't matter if you farm one million acres or one acre breakeven on variable costs per acre is just that break even. You can't expand your Way out of loss per acre

[deasmatt90]

Also nutlug good article, but think about this. WHats different now than in the eighties? Would you say nothing? Quite the contrary, stocks to use BIG TIME! Our supply looking at stocks to use ratio are VERY different than in the eighties, and we are going to see farmers in this country going out of business in record numbers? In the eighties you had fifty and 70% stocks to use ratios, compared to 11.5% today, so what will happen this time around? I was born in 78 so maybe I'm missing something.
Remember this is all my opinion and speculation! Lol

[rayfcom]

In your opinion, what were the factors that caused this ratio to fall so much during the last thirty years ? Did the corn farming community develop new and better ways of figuring out what their aggregate demand would be each year, and use that increased intelligence to better plan their acreage devoted to corn ? If so, what were those new methods and techniques ?

[northernpifrm]

ray tell me how to hedge my cost of production for 19 and 20 and I might agree but I cant cost of fert  and 28% is more than in18 !

[rayfcom]

I can tell you there are ways to hedge the price you receive for your production so as to have a better chance at maximizing cash flows and profitability. Controlling input costs is beyond my pay grade, as the only farming I've ever done was a 50x50 tomato patch to produce the tomatoes I put into my tomato sauce. If you as a farm professional can't figure it out, I certainly will be of no help. 

Off the top of my head, do the farm coops work together to buy supplies for their farming clients ? Sort of like the Walmart model, where buying in huge bulk allows the buyer to name the price. Then pass the savings on to the clients. My guess is that is one of the reasons why there has been so much consolidation of farms in the US into mega-farming companies...its a good way to control input costs by buying in bulk. 

For the smaller farmer, I can imagine how difficult it must be. You work your ***** off in the field from sun up to sundown, only to have an exchange dictate the price you can sell your crops at, and little alternatives as to input costs. My guess is that there are some things that can be done to reduce costs at the margins, but you're probably already doing that. I think the answer in the long run will be technology, like robotics and driver-less machinery. 

One other thought that might work although I have never put it to a back test : when you see the price of one of your input factors jump, find out the name of the company that makes the product and if they are a public company, buy their stock. By the time the increased prices they receive translates into their corporate bottom line, it may push up the price of their stock. The profit that you then make on the stock holding may help offset the increased input costs the company caused you.

[deasmatt90]

Sorry been busy. No imo plain old prices. The old ecomic theory on acreage planted by one farmer still rings true. No matter how many acres I plant or how little I plant I by myself will not change the market. However when farmers all get the same opinion nationally that there will not be a recovery in prices due to blah blah blah what ever the flavor of the month that usda or news media is putting out to depress prices and a "all hope is lost" emotion takes over all the producers as a whole, I would watch out for a price increase.
I mean let's face the average age of a farmer in the US. I'm 40 and that's relatively young considering. Do you think at 68 or 70 years old I would be looking to grow another corn crop with chemical, fuel and fertilizer price increases looming as told to me by a chem dealer. Expecting a 20% increase in chemicals due to tariffs. Probably just a reason to gouge, yet commodity prices staying the same? Especially if I had everything paid for. I would start moving my equipment over to Craigslist and planning on My-Ty's at the beach! Especially if I had no one to take over, and with this ag economy what young man would want to if he had other options? I myself will be penciling out cost of production on corn this year. If I can buy it in Chicago in winter cheaper than I can grow it, what do you think I will do? What's the difference? Fact is the farmers in Midwest would be better of to buy in Chicago if they can buy cheaper than production. and hold than grow. Stocks to use have declined due to farm acres consolidation, some have decided they can grow more to offset low prices but $0.00 profit per acre is the the same income on ten thousand acres as is one acre. A repeat of the late 90s. End users better pray Russia can increase production because the world will need it.
A world corn market? We don't have to worry about that much longer. There won't be enough grown to export.
That's my opinion anyway for what it's worth.
I worked at a prison for 14 years and there's a saying that I took away from there from a co worker with a lot more time than me. " everything's alright till it ain't alright".right now everything is alright for the end user of corn. The end user has become complacent with low prices and when all of a sudden it's no longer alright, we will all be able to look back and see why it all of a sudden Became for the end user " ain't alright"!

[rayfcom]

I think that you must be careful not to miss the idea that there may be a paradigm shift in corn production occurring as we speak, which is causing what has been a six year down trend in corn prices since the ultimate highs of August 2012. I don't believe there can be a continual bear market in corn unless enough large producers have figured out how to produce for less, and its that supply that' seemingly is perpetually coming to market and knocking prices progressively lower by the year. 

I don't know enough about the practices in the farming industry to speak intelligibly about the practices and methods of farming, but I do know that uneconomic decisions that result in production losses cannot be sustained. So for corn prices to continue to trade at or near five year lows, it tells me that enough production is profitable at the levels where the market has been trading so as to ensure continued supply and continual downward price pressure. That tells me that there is a paradigm shift in production methods that some producers have been able to embrace that allows them to maintain their profits even at progressively lower prices. 

Ordinarily and in theory, when one commodity trades below the break even of aggregate profitability, there will be a production shift to other products, and that reduction in supply serves to push prices back up to about aggregate break even. But that's not happening in corn. For three years now we have seen healthy harvests at progressively lower price levels. So clearly, instead of throwing in the towel, some group actually is pressing the bet. Somebody's been able how to maintain their profitability as prices drift lower, and either the underpinnings of that strategy change or everyone else figures out how to do it and prices stabilize at lower levels. As long as this dynamic is in flux, I as an investor will be quite hesitant about expecting higher rather than lower prices for the future.

[sw363535]

Take the time to "play the faming game" totally, even if you never leave the office....... not just pick out a small part "tidbit" and fix farmer problems by seed selection or grain hedging.  

For example the idea you just presented,  a very simple idea, doesn't consider that the producer may, at best, have $50k pe year to invest in corporate stock.  And if he has 50k to invest he has to be  investing $600+ K per year in fertilizer and another 500K per year in equipment and labor to utilize that fertilizer. Is there really an option to pay for a 10% increase in fertilizer costs with a 50K investment in stock......or are you suggesting he not buy fertilizer and invest that expense in stock....... without the fertilizer, the production losses spiral........most of  all can he expect a 100% return on stock investment in 12months to cover the increased cost of fertilizer.  10% is a small increase.

Stay with simple........you made the mistake that most promoters make selling ideas to farmers. Farmers will wait you out until  you impress them by asking if they have indoor plumbing.  Then they will know how little you know about their business model or investing in agriculture on their level.

[rayfcom]

I am the first to admit I know very little about what goes on in the farming business. I have written that over and again. But I do know that if your production costs increase, you have to find new ways to generate revenue to offset those increases if they cannot be passed directly on to the end users. 

 I did not say you should divert a great deal of capital from your main business to embrace these ideas. But when you make your budget for the coming year, perhaps you might decide to spent a bit less capital on farming especially if there is a question as to whether prices will generate a profit much of a profit for you, and use some of that capital instead on alternate initiatives that may wind up making you more money than if that capital went into the ground. The guys with the suits call this method of capital allocation RAROC - risk adjusted return on capital. To me its just good business sense, expand your sources of revenue while controlling costs that you have control over. And save something when times are really good, because you will need it when times get really bad, or when there is a new technology that can help you achieve the requirements described above.

One way I have proposed is to embrace a hedging strategy to help maximize income. Another way is to buy into the stock of companies that are raising the prices of the products you  need for your business. There probably are other ways to generate small increases in income, and maybe technology that can do even more to reduce your input costs. No one idea will offset  a 28% increase in fertilizer costs, but maybe four or five new ideas on the income generation side may add up to the increased costs of input factors. That's where finance and farming become partners. Its not a promotion, but a means of creatively expanding the ways you look at your business to take advantage of information and financial; engineering tools that can be beneficial to your business interests. When we say that business has gone global, we don't just mean geographically., It also means that you need to have a 360 degree view of how the information, knowledge and capital that you possess can all be put to work to help augment your farm income. 

Look, its becoming harder and harder to maintain profitability in farming for a lot of different reasons such as those we have been discussing here for the last few days. Farmers like all other business owners have to become better at thinking out of the box, finding creative ways to generate revenues and control costs,. Even if an idea generates only a small amount of new revenue, its still more than you had before and it pays for something. The more good ideas you bring to your business, the more the revenues add up, and that might be the difference between success and failure on the bottom line. 

btw, the line about the indoor toilets was meant to make people laugh, not to offend. I am sorry if you took it in a way that I did not intend. 

[deasmatt90]

In reality I hope your right short term. All of my corn is sold for the year and I'm planning on buying contracts for 19 when my price target is hit. I have come to the conclusion that there is only risk and expense with storage. Let someone else take the risk of quality decay and storage expenses.
Are you right about continued profitability of some groups or is it an equity burn that is about to run out of Fuel to consume thereby putting out the flame of continued production?
Step right up and place ur bets ladies and gentlemen!
Chicago board of trade casino and resort! Haha!
I can tell you this, I wouldn't want to go to sleep at night with a short position on the table when harvest actually comes in and numbers are calculated.
It ain't made till it's in the bin!
Also in regards to price decrease in corn since 2012 yes it decreased and input cost decreased along with it up until what two or three years ago? Input costs have now stopped in their decline. Chemicals are going up, diesel and crude are going up, fertilizer is going up, parts are going up. New equipment is repaired more frequently than thirty year old equipment due to computer technology and substandard manufacturing, not to mention substandard parts. Everything is made over seas and if it lasts more than six months before it breaks again They expect u to come off ur wallet. John Deere changes suppliers but expects the customer to eat the poorly manufactured product. and much of that repair work can't be done without the dealer anymore at $105 per hour plus travel time if they come to you. I see your point of view as an investor looking at the numbers but as a producer and talking to producers that are much bigger than me, I don't see more corn acres next year I see less, and possibly much less in the US anyway.
As an investor, what would you say it would take in carryover bushels to bring the stocks to use ratio below 10%