In the last 75 days, I've conducted 38 seminars and speeches across the country. In all the years I've been doing this (26 now), I cannot recall moods among grain producers being quite like they are right now. While some are optimistic, many more are depressed, negative and just out-right concerned about where agriculture is headed. I must admit that I'm starting to feel somewhat the same way.
Why Such A Negative Mood?
The following three reasons describe in a nutshell why I believe many producers are concerned:
Cash flows are tighter than normal. LDPs in corn were not as large as they were last year, and while some expenses are starting to drop, they were still very high on this past year's crop. Yields were also hurt in some areas of the country, compounding the problem.
South America's production keeps getting larger and larger. We're having trouble competing with it in the world market, and the news just keeps getting worse.
After four years of the bear market in corn and soybeans, producers are getting sick and tired of just seeing prices go lower and lower. Forget the LDPs. Most of us would just like to get back to the time when we could sell the grain at a profit without government payments.
The above reasons are why the chart below is now important as a strong reminder. Through February, I think it's fairly easy to classify that the grain producers, as a whole, were near the bottom of the fear stage.
In the fear stage, we have a tendency to overreact. We will tend to sell too much, too quickly. I sense the urgency among many producers to do that, and it concerns me when we get to this stage. It reminds me of the winter of 1996 when everyone had finally learned that it pays to forward contract and to sell aggressively in advance. All we had learned in 1996 was that it had paid to do that in the previous two or three years. Is that the case this year also?
One thing never changes about markets — human nature. As many people are bearish today as they were bullish in 1996. That worries me. The news is always the most bearish at bottoms. That's why prices are cheap. The question now — where is the good news going to come from?
Good News On The Way
Let's quit concentrating on the negatives and look at the positives. Consider the following:
Domestic corn usage is at an all-time new high. This year we are expected to use 2.045 billion bushels for food, seed and industry vs. last year's 1.967. If we look all the way back to 1992, it was only 1.5 billion. That's a 30% increase in the last 10 years.
It is estimated by people in the ethanol industry that 18-20 new ethanol plants will come on line this year. The laws of economics have not been repealed. Keep corn low enough, long enough and someone will find more uses for it!
Carryover supplies in corn are declining, and even with an increase of 2.5 million acres of corn this year and normal weather, our estimate is that production will not match usage this coming year.
Parting Thoughts: The fundamentals are starting to shift to the positive side. At these low price levels, I believe we should all be cautious about selling too early under current circumstances. It is highly improbable to have a repeat of 1996, since carryovers were much smaller then. But the potential of weather rallies that could possibly get corn futures back to the $3 mark are not out of the realm of possibility. Every year in marketing is a new education.
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.