Martin: 1999 transitional year for markets

By Tracy Sayler

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Prairie Grains is the official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain Growers Association,
South Dakota Wheat, Inc., and the Minnesota Barley Growers Association.

Martin, a regular analyst on the nationally-syndicated TV program, "Market to Market," recently led three grain marketing seminars in Crookston, Roseau, and Fergus Falls, as part of a joint marketing education effort of the Minnesota Department of Agriculture and the Minnesota Wheat Research and Promotion Council, which administers the state’s wheat checkoff for wheat research and promotion.

Anemic demand and plentiful stocks will weigh on corn, soybeans, and wheat, but Martin says there is a saying: "the best cure for cheap prices is cheap prices," and that adage will be put to test this year.

Of the three major crops in the U.S., wheat has the best opportunity for a price rebound this year, albeit modest. Less wheat acreage will help draw down wheat stocks, as will U.S. government wheat donations. Wheat usage is still steady, and although global wheat stocks are higher, they’re not burdensome. She points out too that world rice stocks-interchangeable with wheat in global food consumption-are the tightest in recent history. "Any (production) problem in wheat or rice, and wheat is going to go up." She sees a wheat market this year that will be soft through February, but rallying next spring and on weather scares once winter wheat breaks dormancy. Wheat could climb into the $3.50-$4.00 range on rallies this year.

While the scale tips to the negative side for the markets and rallies this year will be muted, Martin says there are potential wild card market movers. Weather scares and improvement to faltering economies in Brazil, Russia, and Asia are variables that could turn markets. Another variable that could affect markets before the end of the year: anxiety about the Y2K computer bug. "If there are any fears of glitches that would jeopardize food supply, some countries could step up their demand."

Other market notes from Martin:

• Since 1980, there have been eight years when the percentage increase in beginning corn supplies has been greater than the percentage increase of corn usage from September through November: 1982, 1983, 1985, 1986, 1993, 1995, 1997, 1998. Thus far in six of those years, new lows for July corn futures were made after January 1, with subsequent lows in June-July.

• World oilseed consumption has been steadily increasing, but it’s being outpaced by world oilseed production, which is about the highest it’s ever been, at about 288 million tons estimated in 1998. In the U.S. in 1999, soybean production is expected to increase by 2.5%, sunflower 9%, flax 47%, and canola 77%. It all spells a market that could be "awash in vegetable oil" in the 1999/00 marketing year, says Martin, and a "marketing loan threat that looms over the marketplace."

• Martin is a strong believer in market timing and selling on seasonal highs. For example, the 24th week of the year, around June 12-17, is "year in and year out, a wonderful week to sell old and new crop beans. It’s also a good opportunity to sell corn. Sometimes it can stretch into June 22. But trends indicate there will be volatility that week, and that it will be a good week to sell." September 8-10 also seems to be a seasonal rally period, she says.

• More often than not, you’re better off selling grain before harvest. Some of the best selling opportunities come in the spring. "Sometimes the price is best before you even put the crop in the ground," says Martin. Wheat often sees a preharvest rally in April that sometimes extends into May.

• Banks and lenders need to take a more active role in helping producers with marketing. "How can you accomplish a marketing program if you don’t have the money to do it? More bankers need to be educated about farm marketing; more banks need market advisors on hand," says Martin.

Marketing club benefits

The meetings involving Martin were used to gauge producer interest in forming marketing clubs. There are numerous benefits to participating in a marketing club, says Dr. William Tierney, Kansas State University ag economist. The average farmer who participates in a marketing club makes better marketing decisions (with a resulting higher net income) than the average farmer who is not in a marketing club.

"Making marketing decisions is not easy. Emotional stress and self-doubt are two handicaps that must be overcome by many novice marketers," says Tierney. "The fact that marketing clubs draw on community effort helps to eliminate a lot of the pressure involved in making marketing decisions."

Other benefits:

• Growers can share market information on a regular basis.

• Growers will gain knowledge and a clear understanding of how and when to use marketing tools.

• Growers’ confidence in their decisions will grow — marketing clubs help their members "pull the trigger," or take action on their decisions.

The MWRPC worked with the Northland Community Technical College’s Farm Business Management program to hold organizational marketing club meetings in January. If you missed the meetings but still would like to participate, contact the MWRPC, 1-800-242-6118

Sue Martin, a regular analyst on the nationally-syndicated TV program, "Market to Market," talking with producers at Fergus Falls, MN. Martin recently led a grain marketing seminar there, as part of a joint marketing education effort of the Minnesota Department of Agriculture and the Minnesota Wheat Research and Promotion Council.

Martin’s Five Tips for Marketing:

1. Better marketing won’t happen without commitment.
2. Know your five-year yield average. Use 80% of that number as the maximum amount of bushels to contract.

3. Be aware of the fundamentals, psychology, and cyclical nature of the markets, so you are better prepared to act.

4. Know your cost of production. It’s the foundation for knowing what price you need to sell.

5. Split your crop into thirds. Market the bottom third when price is at the point where you can recover your cost of production plus some profit.

Using a broker if need be, sell the second third on the board, through at-the-money put options or futures, and cover when grain is delivered.

For the last third, buy puts and "leave the top open," to take advantage of market rallies. This is a strategy to consider in "normal" years.

This is not a normal marketing year, with prices near the bottom of the trend line in the last 25 years. Therefore, consider owning call options against any cash sales being made. In the near-term, consider buying call options in the February-March period, when markets are expected to be soft.

That way you would have price protection on weather-related price rallies that might occur next summer. Any rally would likely be modest, but with a call you would still be able to comfortably sell your position if it occurs. You could liquidate the call option on old crop cash sales and use that profit as price enhancement toward cash sales, or if you’re really bullish (?) move stops up to break even on the call and protect money already paid out on options.

Also assess what you need to do for price protection going into the 1999 harvest. That might include forward contracts, or the purchase of at-the-money puts.

Sue Martin is President of Ag & Investment Services, Inc., Webster City, Iowa, ph. 1-800-527-0051 or 515-832-6140.

"Taming the Bulls and Bears" is a market education feature of Prairie Grains, made possible by the Minnesota wheat checkoff administered by the Minnesota Wheat Research & Promotion Council. If you have a question or topic you’d like to see addressed in this feature, send it to: MWRPC, 2600 Wheat Drive, Red Lake Falls, MN, 56750. Phone: 1-800-242-6118. Email: mnwheat @ means.net.