Even though your neighbors are probably more upset if they miss a bull market than a bear market, it's far more expensive to miss a bear market than a bull market.
The table below provides a glimpse of what's happened in the last year — and why catching a bear market is so important. In late October 2003 the cash corn price in Central Illinois was $2.05. The peak occurred in April 2004 at roughly $3.05.
| 2003 | 2004 | |
|---|---|---|
| October 12 | $2.05 | $1.70 |
| Peak Price (April 8, 2004) | 3.05* | 3.20** |
| LDP (at delivery) | 0.00 | 0.38 |
| Net Price | 3.05 | 3.58 |
| Gross Income (100,000 bu.) | 305,000.00 | 358,000.00 |
| *Cash sale | ||
| **Forward contract for October delivery | ||
| SOURCE: USDA | ||
A producer whose timing was just right made an extra $1/bu. from bottom to top if he sold his entire crop at the exact top. On a 100,000-bu. corn farm this would have amounted to a gross income of $305,000.
On the same day, that producer could have sold his old-crop corn for $3.05 and forward contracted the crop growing in the field for harvest delivery at $3.20/bu. That crop is now worth $1.70/bu. or a $150,000 drop in value of that crop.
As I write this the LDP in Central Illinois is 38¢/bu. So for a producer who concentrated on the new crop rather than the old crop, with tremendous luck he could have sold at or near the exact top at $3.20 plus 38¢ for the LDP — a gross of $358,000.
The swing in gross income was even more significant because the crop size in 2003-04 was significantly less than this year's crop. Gross incomes for almost all corn and soybean farmers in the Central Corn Belt are going to be well above last year. The spread in income between those who forward sold and those who did not, however, is going to be more significant than it was a year ago.
Now let's add some insult to injury. Subscribers to The Brock Report were advised to hedge 60% of the 2005-06 crop in the July '05 futures when the spread was trading at a 55-60¢ premium above the December '05 futures. That spread is now trading 16¢ in the other direction.
In plain English, that hedge allowed producers to lock in nearly $3/bu. off the combine for fall 2005.
I fail to understand why producers get so involved in worrying about picking a top in corn and soybeans for old crop and then completely miss (in most cases) the opportunity to forward-price two years' worth of corn and beans.
Big bull markets always lead to big bear markets. This was one of the biggest bull markets in the last eight years and now we're in the midst of the biggest bear market in eight years. This has been a tremendous opportunity to increase producer's net worth.
Almost no one was able to pick the top in either old or new crop. Our average selling price for forward contracted corn was actually $2.71/bu., and with the 38¢ LDP resulted in a selling price of $3.09.
Those who did nothing in new-crop marketing this past year saw a decline in equity far greater than any producer gained on the upside in old crop during the 2004 bull market.
If a farmer had been long corn in the futures market rather than in the bin or in the field, the corn would have been sold long before the bottom because he would have gotten tired of making margin calls.
Some basic marketing rules can help when we go through markets such as this. They include:
Have a goal and objective. My goal is to increase my net worth and sell as much as I can in the top one-third of the annual price range, then the majority in the top one-half. You won't be successful at this every year, but it's a place to start.
Develop a price outlook. Rely on a service that is reliable and keeps you up to date.
Consider cost of production. Remember, everyone's cost of production is different and the market doesn't care.
Consider risk-bearing ability. A producer with a net worth of $10 million can afford to take a lot more chances than a producer with a net worth of $50,000.
Avoid emotional decisions. Greed, hope and fear still guide the majority of our decisions in markets.
Don't let ego get in the way. For many people, ego is more important than making money. Show me a producer who still had soybeans left (even if it was only a pickup load) when they hit $10 this summer and I will show you someone who let everyone in the coffee shop know he still had soybeans left.
Marketing is an emotional business. Keeping an eye on changes in net worth as markets fluctuate helps tremendously in the overall decision-making process.
It's never possible to keep all emotion out of marketing decisions, but sticking with reasonable goals and objectives will help overcome those emotions.
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.