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Veteran Contributor

High farm income year market bias?

 

 

Thesis: In years of higher than avg income (2010 for grain producers)  there would be a bias late in the fiscal yr to not sell more grain, moving income to 2011, thus keeping some grain normally coming to market off the market resulting in a slight premium in prices that will probably bleed out early in 2011.

 

I have not run the data to measure that, any views, comments?

 

TIA

Artifice

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23 Replies
Veteran Advisor

Re: High farm income year market bias?

Makes sense to me.

How much grain is sold to meet cash flow needs therefore more in low price years and less in high.

Then there is the tax reasons to delay income.

In Canada we are able to price, actually sell, the crop and delay receiving the cheque until January so income is in 2011.

Biggest risk there besides driving income ahead for tax liability in the future would be the financial health of the buyer since the longer you delay getting that cheque the less your standing is if the buyer gets in trouble with cash flow.

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Senior Contributor

Re: High farm income year market bias?

Agree.  Always has been that way .

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Frequent Contributor

Re: High farm income year market bias?

I almost never sell on cash market, always futures contracts, but plan those for when cash flow is needed & planning for what year income will hurt or help with taxes plays a huge role in those decisions. So I'd say your absolutely correct, but I also had thought it to be this way for along time.

 

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Contributor

Re: High farm income year market bias?

 Good point but elevator managers in this neighborhood have stated that 70-80% of the 2010 corn has already been sold.  They think this is a higher percentage than other years.  There aren't many corn piles around here.  Unfortunately some producers oversold corn and will have to buy it back when the bins get emptied.  We might have a higher income year, but with as much new paint that's been sold along with accelerated depreciation, lowering tax bills is a lot easier than in the past. 

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Senior Contributor

Re: High farm income year market bias?

I don't believe market behavior is necessarily a zero sum game. In a year when ending inventories may be very tight I think the possible scenarios regarding HOW tight become more clear after the first of the year. If the logical possibilities regarding how it will all play out indicate lower inventories than expected MIGHT be the result, then the highs may definitely occur after the first of the year - regardless of how the market played previously.

 

If it appears that inventories will be very tight then there is an emphsis on volume and control of that volume - increasing competition for assumed available supplies - which then affects producer attitudes. And increased speculation affects the psychology.

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Senior Contributor

Re: High farm income year market bias?

An additional issue in the new year may be the balancing act of fertilizer costs in the face of the need to ramp up corn production combined with possible strong soy prices. Both strong bean and fertilizer prices may make the needed acres of corn for next year hard to attain.

 

I'm predicting fireworks this next year as a struggle for acres increases.

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Veteran Contributor

Re: High farm income year market bias?

For the most part that is true. The big game changer in my mind is the Section 179 deduction being raised to $500,000 retroactively this year. It has allowed many operations to expense all capitol purchases thereby allowing more normal grain sales. I know that is my case at least.

 

The big question in my mind is how much grain is left in producers' hands? I know LOTS of beans were sold here out of the field for $10. Not many left in storage controlled by noncommercials.

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Senior Contributor

Re: High farm income year market bias?

Most farmers in my area would use deferred cash contracts, so, that may not have as much an impact from year end to the next.

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Senior Contributor

Re: High farm income year market bias?

The objective is to keep the income tax just at the top of a bracket without going into the higher one.  It can be done by varying the income taken or by varying the inputs pre-purchased.  Machinery Pete will tell you that in a good year, auction prices in Nov- Dec go up as farmers buy equipment partly for tax reasons.  Many input dealers have sales over the year-end break so a farmer can pay in either year.  Deferred sales are also common - where the buyer has the grain but doesn't pay till 1 Jan.  I do it myself sometimes but it is a risk.

Around here, with a river market for soybeans, the decision to sell may be influenced by lower prices after the locks are closed until river open.  Often virtually no carry in the market.  So, there may be incentives to sell or hold beans for months that are in addition to income management.

Short answer - it may make a little difference but not much and it is hard to measure, in my opinion.

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