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sw363535
Honored Advisor

Optimism takes a dive

No Marketing left to do.......   It is time to sell everything you can raise for the next couple of years while it still has some value.

 

For a while I was feeling pretty good that grains were holding their own through this never ending harvest........ so much for that.

 

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Even beans have fallen to the usda ax.  

 

Won't need that tax cut now....

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19 Replies
Hobbyfarmer
Honored Advisor

Re: Optimism takes a dive

A guy in the Dakota's predicting at current rate of decline (bad basis area) about Feb25th give or take a day or two price of grain should reach zero.

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hwr247
Senior Contributor

Re: Optimism takes a dive

you guys are so pessimistic! Did u forget about LDP's? They will help adjust income! Trouble is loan rates are so low they wont matter anyway! 

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elcheapo
Veteran Advisor

Re: Optimism takes a dive

As we all know, there is a problem in the market. I'm told a couple of thesis are being written on the market.
Interesting concept of a price going to zero. This
Would imply there is zero demand, which is almost
Impossible to get at....any given day a product is
Used, thus demand, therefore demand can not
Be zero.
The cftc would have no other choice to step
In,. What it could do would be somewhat limited
Other than shut down trade. Look up ctfc on wiki
And find out their function....notice on is, stop
A downturn in the economy......perhaps the
Question should be if they should have been
Already activated.
Looking at population trends, historical data on
Consumption, inventory, etc, it is very easy to
Develop a case of market tampering
One can work backwards to see margins from years
Back, and adjust for inflation. If those factors are skewed, then there is some sort of market control
Going on
You ask, how can that be. Say the return to farmers on wheat was 18....now 3.....with adjustment due to inflation's...the factor might be 30 by now.
This is the way an economic formula works....
In this instance s&d are minor factors.
If you do projections of a few years back on use, we are above projections.
Using a value formula from those data sets, the commodity market is very much out of value.
You say it is the market....but there is goverence in
The market and that is based on market principles and baseline economic theory....on those factors
Alone, action should be taken
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timetippingpt
Honored Advisor

Re: Optimism takes a dive

Not to bring an umbrella to your shower of tears, but a good sized percentage of grain farms will increase their net worth this year. Sure they have a balanced approach to growth, owning around 40% of what they farm, cost conscious, and tight controls on toys, but indeed they will increase net worth. So, this becomes a very regional issue with very regional causes and very regional cures. 

 

Ultimately it is a land cost issue and land cost is not determined by USDA, CFTC, Brazil, or even the ruling Obama/Trump elite. Yes folks,  it is determined by hundreds of thousands of self-optimizing (some might say idiotic) independent farmers. You can blame it on others if you choose, but the reality is that $3.50 corn is profitable if you grow 200 bu/acre and have land cost around $200 an acre. As long as the land cost is around $1/ bu of corn grown, it is tough to get into serious trouble. You get very far away from that number and it becomes very hard to stay out of trouble.

 

This before we throw in the ARC payments, and the ins subsidy that limits losses, and the CRP checks, and the CSP checks, etc.

 

The market is not broken, if you over-produce a non-deferentiated product it just has limited value. The user must be given a reason to own it as a speculative investment. You can only take the price he offers. Of course, if we stay in the game long enough, the shoe will be on the other foot, and we will gladly sell them our grain for $8 and make 100% margins.

:-)

sw363535
Honored Advisor

Re: Optimism takes a dive

well when you reach this point there are only a few things to say ......

 

1.  Mike .........Don't get huffy with the humor section, the decline in marketing conversation is directly linked to the declining number of opportunities to market which has now been a nearly 3 year slide and no drought that is not felt in the corn belt will chan.  A slide in which the expense side of production has made very little adjustment.

 

2..... Step right up and say COP has nothing to do the markets......  or the market does not care........ it has everything to do with it....

Crop marketings happen in relation to COP.  Crop sales happen in relation to cash flow, just as crop purchases happen to facilitate cash flow for the end user.  The wording should be COP has everything to do with sales timing.  The market itself is not limited by COP, but the participants are.

 

3.   Marketing is only about crop sales on the local level.  Marketing as talked about in the trade, is about betting on the speculation.  Marketing as discussed in the trade and in floor talk is all about the crop generated in Washington DC.... not the crop the producer raises.  The produced bushels have no place in the "market"  they are on their own to negotiate value and destination.

Nothing exemplifies that better than the excessive basis levels we have had through the price decline.  Grain handlers are having a hard time deciding how much protection they need to survive as the "market" and Production become ever more disconnected.  There are locations in the US that have been transacting corn in the $2 range for over a year now.

 

 

 

 

 

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sw363535
Honored Advisor

Re: Optimism takes a dive

Time you will limp with that example............

 

The shoe will be on this foot very seldom....  It will be on the break even or lower foot most of the time.

 

 

and that example of increasing net worth is one of those carnival acts..........it goes like this...... When you can't afford to do anything else you will pay down debt and have nothing left to invest....  thus your net worth goes up....only if you have a something besides production agriculture to hold your land values together....  

So the slight of hand is to say my tractor is still there and has salvage value and it is paid off.... my net worth went up............. if I ignore the repair bills I am sliding into the future or the ever present productivity decline.

 

That is a bad con game trying to tell a producer he is better off because of lower grain prices............."So if you want to get the good numbers next year just sign on the bottom line"

 

Even in your example ............ Most of this crop will not get $3.50 and most of the corn acres will not make 200 bpa.  The example shows the bias.  you are willing to take 2.5% return on $8,000 land in order to show your still making money farming.....Think about that...... your encouraging those "I can take more pain than the others can" farmers.    Even if you reduce the value to $4000 per acre your still only allowing ownership to make 5% on the investment.......

Especially when the farmer sits in both seats(ownership and operator).  He can't allow emotion to cloud the truth.  If there is only $2 per acre of margin involved it should be shared by both seats and neither should be comfortable.

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timetippingpt
Honored Advisor

Re: Optimism takes a dive

Good points sw but every year is not like this year, the average ROE for grain farms (holding land at cost) for the last 20 years is roughly 10% to 20% a year depending on mgmt.

 

Even in your example, earning 2.5% is roughly 25 times the rate of return on cash in the bank, at least 300% even if you have big CD's you can negotiate. More unintended consequences of ZIRP and currency value destruction.

 

We have long considered paying off debt as personal savings. Since we hold land at cost on our consolidated statements it is easy to determine if our business is capturing wealth or not, also makes it easy for everyone to understand where the real wealth creation comes from long-term, (owning the land, gov subsidies, and non-farm enterprises like tile basically).

 

Your points are well taken about most of the area not getting 200 bu corn or $3.50. You highlight my comments on it being a regional issue. Why are farms that are getting less than 3.50 and less than 200 still growing corn?  Likely it is because their land cost is closer to $100/acre than $200, just my guess.

 

All of this does ignore working capital vanishing, but as long as it is vanishing paying off equipment or land debt, total debt is decreasing rapidly. IF it is going to pay for inputs or cars or $300 cash rent, well then, there is a lack-of-free-cash-flow train about to run through that station. :-)

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Hobbyfarmer
Honored Advisor

Re: Optimism takes a dive

Wish I  could articulate better.

 

Been mulling this over the last few days.

 

Going to side with Time on this one, I feel I know sw fairly well. Time not at all.

 

I also know several farmers about my size and age. We are still fairly deep in the black.

 

Paying down debt with earned income is increasing net worth. It also has the advantage that in future years profit comes at a faster pace due to no or at least less debt service. 

 

More for the sake of more can come at a high price. Labor is expensive, more and bigger machinery is expensive. Once caught in that trap can be financially lifestyle threatening In a down turn.

 

That operator with little or no debt and maybe money in the bank will weather this in fine style may even increase his holdings because of his financial frugality in the good times in years gone by. 

 

Age will be his only undoing.

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sw363535
Honored Advisor

Re: Optimism takes a dive

Your last line pretty well sums up my thoughts... It depends on the goal... and the future outlook

 

If there is an end game to the business, the viewpoint changes.... If one is transitioning to the investor class by plan or age and at the "no debt" stage, which is desirable prior to the transition, then Times points are valid.  Maintaining productivity beyond the life of the depreciable assets is just not that important.  And efficiency is not important at all.

 

You were giving it better thought than I.  I got my property tax bill yesterday and it was a reminder to myself that land as much as i love it, is not always a great investment.  If I own it, and the kid down the road can provide me an amount for my investment, and take good care of it while I'm reinvesting its earnings,  How can I not charge myself that lost potential?  

My county treasurer thinks I should.

 

Anyway that is what inspired me to comment.

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