Taming The Bulls & Bears

by Betsy Jensen, Ag Commodity Instructor, Northland Community & Technical College, betsy.jensen@northlandcollege.edu

Stick With What You Know

Before I begin, I must apologize to Dr. Larry Mack, my macro economics professor at NDSU. I should have paid closer attention in your “Introduction to Macroeconomics” course. At the time, when I was 19, the economic impacts of reducing the M1 money supply seemed insignificant. GDP, unemployment rates and inflation were something that were memorized for tests, and then erased from the brain to make room for the next course. I had no idea the big world economic picture could have such an impact on my local elevator wheat price.So now I look at the world grain markets, and I see we still have historically tight supply levels, and yet plummeting prices. The blame is placed on the bleak global economic outlook. Somehow, someone who bought a million dollar home with no money down and no verified income, is causing my wheat price to crash. What started as a mortgage crisis has snowballed onto my farm yard.

I still haven’t been able to connect the dots, or assign the blame, so I’ve decided to give up. The commodity markets have never been rational, and when you try to assign logic and reason to them, you will end up frustrated because there is no such answer. It is time to take a step back and deal with the new reality of what we have.

First of all, never forget the basic premise of a futures market: To discover prices for a commodity in the future. It is not called a “today market” because traders are doing their best to guess what will happen in the future. The market is questioning if ethanol plants will continue to operate, in the future. Will China’s economy continue to grow at a fast pace, in the future? Will farmers plant more corn or soybeans, in the future? It is a guessing game, and right now traders believe that future supplies for commodities will outpace future demand. It is the opposite of what traders believed just a few months ago.

Second of all, start listening to the market once again. When wheat hit $10, I stopped listening. Maybe you guys kept listening all the way to $20, but when it hit $10 I decided everything from here and up was a gamble. The fundamentals went out the window, and my final bushels would be sold not as I tried to pick a top, but based on dumb luck. I gave up any hope of trying to determine market direction and turned my fate over to Lady Luck. Now it is time to start listening to the markets once again because we cannot rely on Lady Luck to bring us profits anymore.

Right now I am hearing the market does not want any low protein wheat. I am listening. Discounts could get worse, I know, but they certainly do not want low protein wheat today. The market is also offering premiums for 2009 versus 2008 corn, wheat and a little bit for soybeans as well. The old rule of “sell the carrying charge” is back, and I am listening.

Third on the list is that darn cost of production we got to ignore for much of the spring. Prices were well above the cost of production this spring, but we no longer have the luxury of ignoring that calculation. Add to falling wheat prices the increases in input expenses, and creating a cost of production ranks right up there with a root canal: Painful, but necessary for long term health.

Just to completely embarrass myself, I will admit that my first wheat sale for 2008 was at $4.95. If I sell 2009 wheat today, I can beat my first 2008 sale. If all goes well, my first 2009 sale will look just as horrible as my first 2008 sale.

I can’t remember much about macroeconomics. All I know is that we raise wheat, and it needs to be sold. I am still confused about why wheat prices have crashed, or why they hit $20 for that matter, but I cannot let my confusion stand in the way of my primary job: Sell the crop at profitable prices. That’s it. Mortgage crisis, GDP, bailout plans, they are all out there, but even the smart people who are supposed to know all the answers, do not know. To try and solve the mystery myself is too much for one simple farmer. I’ll stick with what I know. I will calculate my cost of production, develop a marketing plan, and try to make some money. That I understand.