For those who thrive on the excitement of bull and bear markets, I think you'll find 2005 to be an extremely boring year.
The grain markets are now going through a base-building phase that could take months, or even a few years, before another major bull market occurs.
When the snow starts to fly in the upper Midwest, most of you will make plans for your farming operation for the coming year.
Many of those plans will include cash-flow projections and making assumptions in order to estimate a financial outcome at year-end.
Hopefully, the following comments will be of help to you in dealing with some of the variables.
Expect weakness in corn and soybean prices. We have a huge surplus of corn and soybeans in the U.S., and barring a major production problem in South America, a major surplus is going to exist throughout the world. That all boils down to long, flat, sleepy markets and looking for opportunities to maximize LDPs.
Expect weakness in energy prices. Markets always overextend on the upside followed by an over extension to the downside. Crude oil at $55/barrel was an extreme over extension to the upside. Don't be surprised if crude oil prices are back below $30/barrel by next summer, leading to lower costs.
Expect a modest increase in interest rates. As the economy begins to improve and the stock market moves higher, the Federal Reserve Board might be a little concerned about inflation. This should result in a modest increase of one or two points in the prime lending rate by year-end.
The stock market will move higher. One key element to affect the stock market this coming year will be energy prices.
As the energy market heads lower, many businesses will start to perform better because of lower costs. Also, consumers will continue spending — and not cutting back — as a result of recent sharp drops in energy prices.
The psychology of this market will change for the positive.
Look for farmland prices to stay flat. Low interest rates enabled many farmland owners to take advantage of tax-free trades, propelling land prices to unbelievable levels. Adding a major bull market in corn and soybeans meant gasoline was poured onto the fire.
But as in any bull market, you need more bullish news in order to keep it going. I don't see that this year. Grain prices are coming down, interest rates are going to show a modest increase, and the result will be a change in attitudes.
But notice I did not say land prices were going down. The chart shows why.
In order for farmland prices to go down, you need to have forced liquidation sales. The only way you can have forced liquidation sales of any asset is to have high debt and high interest rates.
Today the debt is low and interest rates are at all-time lows. Farmland is in strong hands. This means that instead of a market going down, farmland prices may soften a little. But basically, we're looking at very flat prices with fewer sales taking place.
Budget 2005 Cash Flow
Here are some things to take into consideration when putting together budgets for 2005:
The national average price of corn for the crop harvested in the fall of 2003 was $2.42. The corn crop harvested this past fall will average closer to $1.85. However, LDPs this year could well add an additional 35-45¢ to the net selling price.
Soybean prices will average at least $2/bu. less this year than in the 2003-04 marketing year. LDPs will help offset that to some degree, but not as much as in corn. Soybeans will struggle to average even $5/bu. this coming year.
This past year diesel fuel prices (heating oil) started out at approximately 80¢/gal. and rose to $1.60. Look for prices to retreat to the $1-1.20 range and hold there for quite some time. Natural gas prices will also retreat. Overall, expect that your budget for energy costs will decline by 15-20% this coming year.
Corn and soybean yields will return to normal. History indicates a return to more normal weather with normal crops.
Putting It All Together
Major bull and bear markets such as those in 2004 result in more emotional stress than many farmers want to deal with. Ironically, relatively few farmers capitalized on last year's bull markets.
That said, 2005 will be a more peaceful year (no presidential elections) and a year of farm profitability as good as or better than 2004.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.