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Senior Contributor

Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

I think Jerry Gulke does an ok job on sizing up the markets. An article below that is worth the read. I would love to see new crop corn prices hit a cash price of $6, but a little worried we may not see that. $6 corn, a normal yield, and a $11,000/acre farmland value works out to a 7% Return on Investment Ratio. Not to bad considering the 50+ year average ROI Ratio is in the 4 to 6% range for producing corn. 1% higher than average, any Ratio above the long-term ROI Ratio is a good profit level I believe. At $5 corn the ROI Ratio drops down to 4.75% and at $4 corn the Ratio is 2.77%. The above ROI Ratios are a good picture of predicted net profits per acre, excluding land costs of course. Factor in a $500/acre cash rent payment and a $4.50 corn price and a guy is basically farming for free like so many guys did during the 1982 to 1986 Farm Crisis years. Nobody wants to farm for free, kinda hard to support your family on a $0/acre net farm profit level. Article is below:

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Producers Need a Goldilocks Year

 

By: Jerry Gulke, Top Producer Market Strategy Columnist

 

Corn and soybean price rallies of 2010/11 and 2012/13 peaked prior to or just at the beginning of their marketing years. Both price rallies stemmed from less production, not an explosion in demand.

China’s year-over-year increase in soybean demand helped these rallies, because demand from the rest of the world did not significantly increase. In fact, without the five-year growth realized by the ethanol industry’s consumption of 4 billion bushels of corn from 2006/07 through 2010/11, these prices would have been short-lived. In 2008, corn’s price explosion above $6.50 per bushel only lasted six months. Remember, crude oil went to $145 per barrel on the idea we were going to run out and in the process we were burning food for fuel. Then prices collapsed in the fall of 2008.
Corn spent almost three and a half years waiting for an increase in demand or a drought to get prices back above $6. China didn’t do the job, but the crop problems of 2011 and 2012 did.

Memory Blocks. A do-nothing approach of selling at harvest worked as well as anything during the last two bull markets. My column in the Summer Issue of 2012 dealt with the need for flexibility using crop insurance. Those who initiated early cash sales last year discovered that using crop insurance as a risk management tool was not the remedy they thought with half a crop.

The approach of buying December puts and rolling them up every 50¢ to raise the price floor cost nearly a $1 per bushel by the time the puts expired. The memory of last year’s corn price jumping from $5.50 to $8.50 per bushel in 60 days might be why producers struggled to lock in $6 to $6.50 futures for the 2013 crop.

"South American   ending stocks plus normal soybean yields in the U.S. this year means as of   Sept. 1 global soybean supplies will be a billion bushels more than a year   earlier."


There is a huge difference between 2012, when we had strong demand and low production, and 2013, when we expect reduced demand and global increases of corn and soybean supplies. The United States’ inability to produce a minimum of 12.5 billion bushels of corn caused prices to explode. As a result, demand dropped 1.2 billion bushels.

Need to Recalibrate. A supply shortfall incentivizes farmers to expand acreage or end-users to cut demand in order to meet existing supply or some combination of both. Both strategies are in the works for corn and soybeans. South America and Europe have increased corn and soybean acreage, and we can expect the same for the U.S. All the while, corn demand has been curbed to meet a 11.2 billion bushel crop. A below-average crop of 150 bu. per acre this year could yield 12.5 to 12.7 billion bushels of corn. Buying back demand won’t happen at $8 corn; we’ve already proven that.

South American ending stocks plus normal soybean yields in the U.S. this year means as of Sept. 1 global soybean supplies will be a billion bushels more than a year earlier.

Needless to say, with the February insurance revenue average at $5.65 per bushel for corn and $12.87 per bushel for soybeans, there is still considerable risk. A corn yield 25 bu. below trendline and a soybean yield 5 bu. under trend will mean a price repeat of last summer. Conversely, 156 bu. corn and 44.5 bu. soybean yields might leave summer of 2012 prices a figment of our magination. We need a Goldilocks type of year—not too big and not too small, but just right. This would keep the market on edge, without exploding prices inviting more competition and changing the livestock industry more so.

As they say at the Chicago Mercantile Exchange, there is risk in trading grains and oilseeds; perhaps $2 up or down this year. Crop insurance might become what it was intended to be: a stop loss vehicle, not a profit center. Nor do we need a 156 bu. corn crop that suggest a couple years of low price demand building. As I have stated in previous columns, it will be the lowest price seller that wins competition, not the lowest cost producer.

For a long-term look at corn prices on the chart, visit the Gulke Group at

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Honored Advisor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

These Progressive Ag boys were 100% sold on 2013 corn way back http://mgex.com/documents/012513.pdf   gotta give credit where credit is due, however no one has planted or even had the frost go out around here yet.

 

There hasn`t been any opportunity to even contract for the insurance guarantee yet, so let `er ride.

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Senior Contributor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

So they are 100% sold on new crop corn BA DEERE, yes, have to give them credit for that. I am praying that we see $6 new crop corn prices again. For me, a $6 new crop corn price and a average corn yield, that works out to a 7% Return on Investment Ratio for an overall whole farms average profit level. As mentioned, 7% is 1% above the long-term average ROI Ratio range of 4 to 6%. Anytime you can beat this 4 to 6% ROI Ratio, even by as little as 1%, I would consider that being a corn price victory. In 2012, it appears my total, all farms Ratio will be around 10%, a very, very, good Ratio if I can brag a little!!!!!! LOL

Even $5 corn would give me a 4.75% ROI Ratio, which is still in the average of 4 to 6%, yes, on the low end of the scale, but still in the average. The February insurance revenue average at $5.65 per bushel for corn would be a an even 6% ROI Ratio, at the top of the 4 to 6% range. I would gladly take that ROI Ratio too for the 2013 corn crop. I sure hope we get a new crop corn rally to $6 corn, I really, really, would love that 7% ROI. That would really look good on my farm software.

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Veteran Contributor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

Look a little closer BA,  Progressive Ag was sold on 2013,2014,and 2015 and not just corn.    Soybeans also.  And wheat although not as aggressively.    I doubt their customer base is that loyal that they followed the advice 100% but for me all I can say is cha-ching.

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Senior Contributor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

Dismalscience- are you saying that Progressive Ag is now 100% sold on there 2013, 2014, and 2015 crop corn and beans????? Boy, that seems pretty darn risky, I do not have the manhood/balls to do that. Are you sure about that? I don't follow them much, but DEC/2014 corn cash prices are only $4.80 currently. DEC/2013 corn cash prices are at $5.22 for the ethanol plants in my area as of today. Maybe, we should be happy to get $5.50 for new crop corn, That is a rough 5.75% ROI Ratio which isn't all that bad considering, but the hard part is going down from the 10% ROI Ratio in 2012 down to 5.75% in 2013. A drop in value of the Ratio by 1/2. That 1/2 drop in the ROI is what makes it so darn hard to except. But really, looking back 50+ years, 5.75% is an average return on all the money we have tied up in farmland, and then equipment for the guys that farm the land themselves, unlike myself that Custom Farms his dirt.

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Veteran Contributor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

rsw,  Take a look at the link BA provided.   They are 100% sold but at much high levels than are currently available.  They can always recommend a buy back.  That worked pretty good last year to sell corn in Aug/Sep of 2011 and buy it back in April of 2012 once the drought talk started heating up.    To pass up the high prices that existed last fall is starting to look foolish.  I'm not satisfied with 5.75% ROI.

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Advisor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

Why does the farmer insist on bidding the profit away via $500 cash rents and new paint whenever he has a couple of good years. There is enough for all of us until someone gets greedy.

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Veteran Contributor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

425cat,

 

That is why you have to be a contrarian in the farming game.   Just last week every poster on this site was all bulled up.  It certainly paid to be contrarian.   Right now everyone wants to add land by any means necessary.  Right now is the time to be positioning yourself to add land when the BTO's start bailing.  If you are chasing 500 dollar an acre land you are too late.

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Senior Contributor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke,/ DismalScience

Dismalscience- yes, they are brave to be sold that far out, I am not sure that I could to that, guess I am a chicken!!!!!!!!!!! LOL

Also, the 50+ year ROI Ratio is in the 4 to 6% range and you mention that is not enough. What ROI Ratio would you be happy at?

8%, 10%, 15%? Thanks.

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Veteran Contributor

Re: Producers Need a Goldilocks Year/By: Jerry Gulke, Top Producer Market Strategy Columnist

I think if you are going to risk all your capital and pour your life into an enterprise you should shoot for 15%. 5% is probably ok for a passive investor.
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