By ANN HINCH
Assistant Editor BOYNTON BEACH, Fla. — For farmers who don’t mind trading commodities futures directly and are planning to seed corn this spring, Shawn Hackett recommends taking immediate advantage of higher corn prices to sell more bushels and lock in contracts.
“That’s what I would advise them to do,” said the president of Florida-based Hackett Financial Advisors, through which he manages funds for investors and risk for farmers.
In approximately 20 years of stock and commodities experience, the volatile commodities market as it stands is a first for Hackett. “The whole system is going through a major adjustment, because we have not seen prices do this since the (19)70s,” he explained.
This agrees with an assessment that’s been put forth all year by Dr. Chris Hurt, Purdue University ag economist. He and fellow Purdue ag economist Dr. Corinne Alexander noted that March decreases in soybeans and record $6 corn futures last week alone might swing some farmers from planting soybeans to corn in 2008.
Risks galore As rosy as corn futures look – and even soybeans were rallying somewhat last week on a possible shift to more corn – Alexander and Hurt pointed to the widening market basis for both crops, as well as for wheat. Hackett explained when futures rise so quickly, it takes a while for the cash price to catch up, leaving the market more volatile.
The two Purdue experts said many grain elevators have stopped forward-contracting for futures beyond a 60-day delivery. Hurt said this is because there’s a great deal of financial risk in having to meet margin calls, and while an elevator’s gross profit might be 15 cents per bushel, after costs it’s dropping to only 2-3 cents. If a grower defaults on delivery, an elevator can sue – but that takes time and money.
“These grain elevators, they don’t know what the basis is going to be this fall,” Hurt explained. “Basis will probably be better if the crop is a decent-sized crop.”
This puts more risk on growers: They may trade futures themselves or wait until closer to harvest to sell finished crops.
Hackett said to cover higher possible trading losses, the commodities exchanges have raised margin requirements.
Elevators may just not want to absorb higher margin costs, but he said the refusal of many is also because their banks are refusing to extend or increase lines of credit during such market volatility.
Of course, the situation isn’t much different for individual farmers who want to trade on their own behalf, he said. Added to this risk are higher variable farm costs – fertilizer, seeds, chemicals, fuel. 2008 costs for corn growers are up 59 percent over last year, Alexander and Hurt said (and for corn-after-corn, fertilizer costs will likely go higher).
Costs are also up for soybean and wheat growers, by 52 and 50 percent, respectively. These do not include rents or real estate costs. Whatever a farmer grows, Hurt advised them to shorten their input costs and not leap ahead to 2009 just yet.
In a cost analysis of December futures, the economists compared the wisdom of growing soybeans over corn, based on market information available on March 3 and March 31. The expected cash price for beans had dropped enough in that month to make corn more profitable, whereas on March 3 beans had the clear advantage. (Wheat grown on low-quality farmland also lost its March 3 advantage to corn, by March 31.)
Finally, there is the impact of non-food financial markets on the commodities exchanges – not a long-term impact, Hackett said, but it can cause short-term problems. Investors who are scrambling to raise money to cover margin calls caused by sub-prime mortgage and real estate market losses, for example, might quickly liquidate commodities shares back into the market.
Livestock losses
Hurt said livestock producers who can run their operations for low to moderate costs will likely stay in business and weather this year’s grain prices. He speculated producers will cut breeding herds and make inventory reductions that show up this winter or next spring. He also thought they should see improvement in April-May hog cash prices.
Though some livestock producers may feed dried distillers grains (DDGs), Hurt dispelled the notion that this ethanol byproduct can make a straight replacement for lost corn – the volume isn’t the same. “More ethanol means a reduction in corn for the feed sector,” he said.
Despite assurances, Hancock County, Ind., resident Tom Boese said, “I think the livestock industry is at great risk.” He has experience as a feed salesman and an elevator operator.
“I’ve been in this business over 60 years,” he said. “(Grain prices will) break them. When they’re losing four to five cents a pound for every pound they produce, it’ll break them.”
If the ethanol industry is only using corn as a short-term “bridge” until it can make fuel from cellulose or other sources, he wondered if it is worth the potential long-term loss to livestock producers by using corn stocks they could feed.
“I don’t think you can make it a competitor to food,” Boese said, adding the introduction of ethanol hasn’t seemed to reduce oil consumption. “So far, we haven’t slowed down filling our tanks.”
“At the end of the day, the physical supply and demand will win out, anyway,” Hackett said, citing corn prices that hit a $4 high in 1974 – and then didn’t again until 1996, after which they also went down. “Corn prices will continue to go up until it no longer makes any economic sense.”
He would advise against trying to curb foreign demand with export taxes such as those temporarily imposed by Congress in the early 1970s. It’s a short-term fix, he explained, that lowers prices domestically and reduces future production potential.
“If you artificially depress prices, it’ll probably give us 12 months of lower prices, and then they’ll go even higher,” he said, adding he expects to see the worst of food inflation end with this year, but admitting, “It could be a very, very ugly 2008 before we get there.”
This farm news was published in the April 9, 2008 issue of the Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee. |
