One thing in life and markets that is almost inevitable: Big bull markets are followed by big bear markets. Whenever markets are in the final stage of a long-term bull, however, the talk at the coffee shop is, “This one is actually going to be different.” That was the mood going into the November crop report, as well.
I would agree that all markets are different. But the end result of major bull markets has always been a major bear market, which is what I believe we will face in 2011 corn and soybeans. The events that cause bulls to go to bears are never obvious until after the fact. But remember that bull markets need bullish news every day to keep going up; bear markets need no news at all. They can fall from their own weight.
No doubt these are different markets. Ethanol is booming and will continue to boom. Chinese soybean buying is at record levels, and they want to be buying DDGs. This is all terrific news. But it is also the news that caused corn to rally from $2.50 to $6 and for soybeans to go from $9 to $13. Come June 2011, I bet the world will not have a shortage of $6 corn or $13 beans.
With all that said, the November crop report appeared on the surface to be bullish. Corn and soybeans traded sharply higher and before the day was over, corn closed sharply lower with a technical reversal down and later in the week soybeans did the same thing. As a technical analyst, that is what most of us would call a classic blow-off top.
Will the market collapse? No. I don’t see a $4 or $5 bear market in soybeans, or even a $2 bear market in corn. How low this market goes we will only know when it’s over. All I am fairly confident of at this point in time is that the market is done going up. If prices are profitable, sell it. If you are a buyer, wait.
Many of you have been very happy with the consistent increases in the values of your farms over the last several years. Can that continue, given what has happened in the residential real estate market? Good news – it appears to us that farmland values should remain strong. Unlike the housing bubble, farm price increases have not been accompanied by a sharp increase in owner debt levels. This means that even if prices drop a little, there won’t be a rush of forced liquidation sales, unlike what has happened in the housing market.
Meanwhile, high futures prices give renters a chance to lock in good profit margins, keeping cash rents on an upward trend. Even people who aren’t traditionally interested in agriculture want to get in on the act. I regularly get calls from investment bankers representing farmland investment trusts, wanting advice about how to buy and manage farmland. Wall Street wants to buy your dirt. With the U.S. seeing such difficult economic times, agriculture is just about the healthiest sector our economy has, and farmland values should continue to reap the benefit for the foreseeable future.
Enjoy the holiday season.
December 2010