The Rest of the Story: Global Demand or Lack Thereof
This is the first issue of our new endeavor to provide the rest of the story behind some of the issues in agricultural commodity markets in hopes that it will provide information to help readers make better management decisions especially in marketing their crops/livestock. This column will provide added enhancement to my Friday Agweb radio comments as well.
As an introduction I was born and raise on a farm near Ellendale, ND, received my BS degree in engineering from NDSU in Fargo, and my MBA from N IL University in Dekalb, IL. majoring in finance and management. I view the engineering degree as an enhancement to think logically. My MBA degree perhaps was the most important aspect of successfully managing my farming and personal financial endeavors especially in the area of financial management and would recommend younger farmers to enhance their education in the area of finance and management as much as possible. Perhaps the best background is to have picked my parents well!
I have been writing the Top Producer Marketing Strategy Column for decades as well as providing marketing comments on DTN for the last 25 years. This column will be an extension of my focus in that area as well.
GLOBAL DEMAND—OR LACK THEREOF
In recent years, most media analysts, USDA, research firms such as Informa Economics and commission firms (brokers) have underestimated US soybean demand as depicted in their ending stocks estimate at the beginning of a marketing year beginning on September 1 and ending August 30th. In particular Chinese demand was underestimated as well non-Chinese demand which is said to be 40% of the total global increase in soybean and soybean equivalent (soymeal). This can often lead media analysts who follow USDA or a particular research firm to make recommendations based on an ending stock number that may lead to missing a price rally when it is found that the estimates were in error. Early in 2016 was one of those years when the accepted opinion by some was that ending stocks would be huge based expected global usage coupled with a large South American crop of soybeans. From Mid-August of 2015 to the end of March 2016 soybeans traded in a sideways pattern of 40-50 cents before breaking out to the upside to gain nearly $3/bu by early June 2016. This in a backdrop that had some TV analysts suggesting $8.50 and lower was on the horizon. In fact, Top Producer editor Nate Birt did a story mid- year on just that issue interviewing producers who were caught up in the after-plight of leaving thousands of dollar on the table from recommendations by money and bushel managers. Unfortunately protocol of a bushels-management marketing was that once the sale was made it was set in concrete for the most part and the manager did not have a plan B to exit a losing situation or to revise the strategy if it was found to be ill-conceived.
Flexibility has been a basic tenant to my approach to marketing, realizing the buck stops with the one who pulls the trigger having the flexibility to admit when he is wrong or when technical or fundamentals change. These pseudo marketing programs will have the underlying backdrop that obligated the producer/customer to ultimately deliver the physical commodity. One has to question in such situations whether a buyer of a commodity, saddled with the task of managing price risk for the seller, if there is potential for conflict of interest as being able to source the physical commodity is seemingly the ultimate objective. I personally would not get involved in such a one-way agreement unless I had the flexibility to buy-out of a bad decision without penalty other than a price differential. The idea of that “if it is too good to be true, it may be” is still valid.
The ongoing perception that the ending stocks of soybeans in the US would once again fall compared to current expectations, in a backdrop of a weather market in S America, kept a friendly undertone during the weather market, which I discussed in my Friday radio segment was becoming old news having lasted for six to eight weeks. The price discovery process (futures market) eventually discounts fundamental events that leads to either a pause in trend that either refreshes or a “black swan” event that enters the mix and threatens to distort conventional thinking.
The concerns over tariffs and possible retaliations looks to be that black swan event that was surfacing over the weekend to create the collapse in grain prices to start this week, along with acreage hype on expanding bean acres and the lowering of corn acres. The market acted today (March 19th) in the case of corn, may not be enough to curb ending stocks sufficiently. In the case of soybeans, rain in Argentina likely put a low production point of soybean production at 40 mmt. Surprise moisture in hard winter wheat area cut price prospects off at the knees as well.
Regarding the underestimating of global demand for soybeans, there is historical evidence that there is validity (see chart below). In the eight years previous to this year, the ending stocks for a US marketing year on August 30th were less to much less than that predicted nine months earlier. USDA and research firms were guilty of mid-judging demand leading to lower price projections when in fact by the time August rolled around, US carryout was greatly reduced. I previously discussed 2016 as an example that has made traders/analysts nervous of missing the upside again this year.
This year, that historical data was used to predict the same thing happening this year and the demise of the Argentine crop aided in the bull market that was inherently present back in Nov/Dec and more evident on Jan 12th with the price reversal coming that came to an end last week about 7 weeks later.
The question the market has to decide is if the current 550 mil-bu projected carryover will actually be under 400 mil-bu by Aug 30th or not? The start to the week this week with both July and November (new crop soybeans) suggests the market knows whatever the result, we will not run out of soybeans before we harvest next fall. Managing price risk to such a fundamental unknown is difficult as markets can take away in one day what it took a week to gain---today is such an example. Technical sell signals last week further emphasizes the end of a weather market.
US demand uncertainty thanks to tariffs and agricultural trade organizations’ concerns for retaliation hitting agriculture the hardest, especially from China and soybeans, has taken on new emphasis adding to the sudden negative trade, further exasperating long liquidation that is finding no new buyers in soybeans while spilling over in corn all ahead of what appears to be a monster report on March 29th. Wheat got hammered by “surprise” moisture making one wonder if forecasts can’t get it right for 3 days, what worth is a 30-60-90 day other than being a guess as good as yours or mine?
Our in-house client acreage survey nearly two months ago reflected what now is becoming new news in the media and helped maintain an overall bearish scenario to 2018 soybean prices regardless of S American weather. Having such a perspective doesn’t mean a hill of beans to the larger market as it will trade on innuendo, rumors and 8-10 day weather forecasts.
Often times we will be asked during an interview, “What would you recommend a farmer do now”? This is a loaded question as it implies there is a recommendation that can be made to remedy a difficult situation when in fact it isn’t what to do to now, but more of what has been done to preclude being in harm’s way if/when a situation develops that is negative to profitability (a significant price drop in the case of a producer). In the case of soybeans my recommendation to Gulke Group clients has been to have perhaps the largest cash forward contracted position (40-50%) as recently as a week ago, plus futures hedges on the balance as close to 90-100% as one feels comfortable. In the short run, it offered protection from an old weather market. In the longer term allows flexibility yet in planting decisions. If by chance soybean prices fall precipitously ahead of and post March 29th report, the opportunity exists to take profits on hedges, and in turn focus on changing planting mix should prices dictate. I am not a fan of buying options as my experience has been that they are made to be sold, however in certain circumstances they are useful. Short term call options for those who were extensively sold or felt uncomfortable ahead of a major Argentine weather even were used on a portion of sales/hedges. Today’s collapse in prices made those cheap (8 cent) calls worth the money to hold hedges. Likewise the technical sell signals in corn late last week prompted buying cheap April corn puts at 3 cents in a backdrop of what I see as a longer term bullish scenario in corn fundamentals, but then again, the market doesn’t care what I think and often we at Gulke Group are pro-active, ahead of the market perceptions. It sometimes takes a long time to turn a big ship around that is saddled with overweight of stocks.
No doubt the next seven days of trading will see some evening up by traders and make for an interesting if not surprising report.
For today, some background of market thinking as well as my perception is hopefully helpful in the on-going learning experience a risk management. You will not necessarily read of future actions or reactions as these are proprietary for paying clients. However this should not negate an education process for readers.
Speaking of an education, we are conducting our annual spring marketing outlook conference in Chicago March 28-29th. We will headline Drew Lerner and the outlook for weather, and executives from Deere Co. presenting their global outlook on Ag and the potential impact of tariffs and trade, as well as what “big data” has in store, who will compile it, who owns it and how will it be used to the benefit of the producer. In addition Roger Wallace will give his outlook on livestock, the Ag economy and equities (stock market) and I will give my personal technical/fundament outlook as usual. Given the turmoil in our current administration it will all be timely subject. For information on attending our spring conference in Chicago March 28-29th see www.gulkegroup.com or phone480-285-4745; 707-365-0601. I invite your comments to this new endeavor or a dialog on anything else on you feel pertinent by contacting info@gulkegroup.com.
I wish you good marketing and I promise future columns will be shorter.
Regards,
Jerry Gulke, Pres