Thursday, January 24, 2008

Live (more or less) from Wisconsin!...

More proof you don't have to be warm to be excited. As I mentioned below, I had the happy opportunity to speak to the WI Corn/Soy Conference in Wisconsin Dells. [Note to meeting planners: since shifting to a resort hotel with a water park larger than most IL lakes, attendance has tripled to 1200 or so.]

Go figure.

Anyhoo, I got to hear two superb presentations while I was there.

First, Darrin Newsome from DTN. For a guy from the loathsome competition, he was surprisingly lucid, but his most important opinion was probably lost when he mentioned two numbers: $6.10 corn price target, and (I swear) $20 beans. I don't think anybody heard anything he said after that.

You could see the eyes glazing over.

But along with those mind-boggling numbers, he uttered some sage (which means I agree with him) analysis: the futures market is no longer serving the function of laying off risk for farmers. In other words, hedging doesn't work anymore.

(To be fair, I have great respect for Darrin, but all during his speech he kept saying things like "I've been in this business a long time and..." OK, the only problem is the dude doesn't look old enough to order beer.)

Obviously, The Andersons agrees with him.
According the The Andersons' notice, the firm will continue to write HTAs on grain delivered through August. But, as confirmed by a FarmFutures.com poll over the last week, the fees charged on the contracts are much higher than the industry charged traditionally. The firm will charge three cents per bushel for corn, seven cents for soybeans and three cents for wheat.

In addition, the notice said the firm will purchase grain for delivery from September 2008 through August 2009 on a flat price or basis-fixed contract only, with no HTA's written. For September 2009 and beyond, only basis only contracts will be used, with not [sic] HTA or traditional flat price contracts done. [More][I think Bryce was a little excited when he wrote this one)
I have never used HTA's so that part didn't resonate with me. But I have given serious thought to selling 2009 fall beans (although now, of course, I will hold for $20).

Then Randy Gordon from the National Grain and Feed Association spoke and essentially underscored Darin's remarks. The elevator biz is under extreme financial duress right now and the last two days sure didn't calm them down.
In so doing, the NGFA warned the CFTC of major underlying concerns over the predictability of convergence between cash and futures prices during the futures delivery period, as well as problems with hedging and pricing efficiencies, that have dramatically increased the need for grain elevators, feed mills and grain processors to access increased capital to finance margin calls.

“The lack of convergence between cash and futures markets during the delivery period, in conjunction with rapidly rising commodity values, has created huge borrowing needs and financial risks and exposure for the grain-buying industry,” the NGFA said in a statement submitted to the CFTC. “As banks have begun to question hedging performance in futures positions, borrowing lines have been stretched to the limit or beyond….Cash basis levels (the difference between futures and cash market prices for a specific commodity) are widening to reflect much higher financing costs – to the extent financing is even available -- that now are being forced into the system.

“Both the overall confidence in the (futures) market and the livelihood and business structure of the cash grain industry are at stake,” the NGFA warned. [More]
This stunning consequence of skyrocketing prices looks to me like a land mine on our road to prosperity. There is a very real possibility of losing many of the pricing tools we have enjoyed and come to depend upon due to the influx of enormous amounts of speculative money into our relatively small grain pits. Throw in the shift to electronic trading and volatility is the name of the game.

I think this situation, perversely enough, justifies not just the existence but market muscle of farmers' favorite punching bags: giant grain companies. When funds wade into the pits, producers need a go-between with enormously deep pockets and experience to whom I can shift my risk. While I like to give Cargill (my #1 customer) a hard time because of their occasional lumbering slowness in execution, I also take my hat off gratefully to their decision to step up to this challenge.

Dennis Inman, head of their grain origination unit AgHorizons gave me this response when I e-mailed him a "what-the-hey?" question about Cargill's plans for future delivery contracts:
...for now the very short version is that we continue to buy both flat price and HTA's (we call them NBE or No Basis Established) for 2008, 2009 and 2010.

We did in the last couple of days modestly raise our service fees. Each
of the local businesses establishes their service charges based on the
minimum requirements we send from Minneapolis....

Obviously a lot of uncharted water in the current environment but we're
still committed to our mission of helping farmers prosper and providing
a vehicle for forward contracting and other forms of risk management is
still core to that mission.
If our New Agriculture is going to be dealing with giants, it doesn't hurt to have some on our side (or at least for hire). Constantly bashing large grain companies like Cargill or Bunge or ADM could be shortsighted at best, and remarkably dangerous to our future at worst.

In fact our knee-jerk hatred of "Big Anything" (Oil, Operators, Labor, Enviros, etc.) is a little more than lazy way of separating the world into good and bad guys. The idea that big organizations could possibly be composed of decent people just like us trying to do their jobs as well and honorably as they can (even at the top) never seems to receive any credence at all.

The weird thing is, the more chances I have to talk to those folks the more accurate that view becomes for me.

4 comments:

don said...

John.
6.10 corn & 20.00 beans!!! What would that do to land rental and sales? What is an acre of good corn & bean land worth?

John Phipps said...

don:

Let me be a bit more precise about Darrin's comments. He did mention $6.10 for corn as a technical upside target.

The other comment was his floor trader told him nobody laughs any more when somebody mentions $20 beans.

As for what this means for land and rent, I think it rules out any declines in the near futures...

BrianOH said...

John,

I always enjoy reading, but sometimes you just really hit it on the head. I am disgusted by the constant demonization of corporations by cultural elites and populist demagogues, and kudos to you for a simple observation which I share. In 25 years of farming, I have been lied to, welched on, and gypped more by farmers and other individuals than by any corporate rep - bigwig or flunky.

Corporations are made up of flawed humans, but the idea that they are the devil, while the little guy is the salt of the earth, is pure panderage. The organization of people into a common entity for the production of goods and services, and yes, weatlh, is one of the greatest accomplishments of our civilization. And it reaches its zenith when it also empowers the individual, both within and without. There are many examples of this in America, and it is perhaps our greatest economic strength. But hey, it is too successful, so let's just rip it to shreds.

(My inner Ayn Rand is coming out:).)

Thanks John, keep up the good work.

Brian

John Phipps said...

Brian:

Kudos on the vocab, sir - I thought you made the word "panderage" up. Not only does it exist - it works perfectly as you intended.

Maybe it's getting older, or simply recognizing more my own manifold flaws, but I find giving people the benefit of the doubt is more efficient and certainly more enjoyable that constantly suspecting the worst.

I also have discovered I can eventually recover from even cheap shots without a huge loss. Plus much of the criticism/pushback is deserved and useful.

Thanks for commenting.