More grain producers than we'd like to admit are on the edge financially. I'm concerned about the financial shakeout that could lie ahead this year.
One would think that with record yields and near-record high prices, this should be one of the best years financially for all producers. But as many lenders have told me, a large share of their clientele watched the market go up — and watched it go down — and now they are sitting on piles of corn and soybeans.
As I write this in early February, 75% of this year's corn crop has been LDP'd or redeemed from the loan program. With a carryover now pegged at 2.01 billion bushels, it's by far the largest free supply carryover in corn since the beginning of the LDP program.
What's also startling is that 43% of the soybean crop has also been LDP'd — and the LDP opportunities haven't been that great.
What this pattern shows is that the majority of producers are betting that corn and soybean markets have already made major bottoms. Now they want to capitalize on the upside. But what if the market goes down instead?
I hate to be an alarmist, but I believe there's a high probability that corn already LDP'd will in fact end up with a net selling price significantly below the loan rate. Even with large yields, the financial strains could be significant.
Bearish For Beans
Without Asian rust, the price future for soybeans could be even worse. Carryover supplies of soybeans this year are now pegged at 440 million bushels vs. last year's 112 million. With a normal crop, we believe next year's carryover will exceed 670 million. That would be the largest carryover in history. Worldwide supplies of soybeans are also at all-time record highs.
Why then would so many producers be bullish beans and hold them? The answer is simple. Too many people only remember last year's bull market.
The other bullish factor that is that some producers are counting on Asian soybean rust to knock out a big portion of the South American crop as well as the crop in the southern half of the U.S.
Many producers are basing their marketing plans on a potential disaster. What happens to the market if a disaster doesn't occur?
Big Bulls … Big Bears
There is an old saying: “The bigger the bull, the bigger the bear.” Last year was a big bull and this year is an enormous pear.
How low can this market go? To be honest, I don't know. With a normal crop and the amount of grain that has already been LDP'd, anything can happen.
This is not a prediction, but the thought of corn futures going to $1.20 or $1.30 is certainly a possibility. Cash bean prices starting with a three are also possible.
This has been a year when aggressive marketing has paid off big. Subscribers to The Brock Report have been 100% priced on this year's corn and soybeans for months. We're also 75% priced on next year's corn and 80% priced on next year's beans at prices considerably above current levels.
But what should your neighbor do who has sold little of the old crop and nothing in the new? To begin with, he should start looking for a place to lower his risk. Having grain LDP'd and not priced is highly risky. Get a large portion of that crop sold.
There will undoubtedly be some weather rallies this spring or summer. But from what price level will these rallies start? For those who are highly leveraged, this is a year when the stakes are going to be high. Manage your risk. Those who have had large crops and marketed well are in the financial driver seat right now.
Let's hope some of my assumptions are incorrect. There are normally no winners when you have to rely on someone else having a disaster to bail out a poorly designed marketing plan.
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.