Ever since the grain markets went into a new plateau in the 1970s, almost every rally since someone has claimed that another new plateau was in the making. It has never happened until now — and this is certainly a new plateau.
Two enormous fundamental changes have obviously impacted the fact that a new plateau now exists. Those two changes are the advent of the ethanol industry and China's emergence as a major buyer of commodities. Neither of these two trends is likely to change in the near future — and, in fact, they are both likely to increase.
This is both exciting and challenging. In 2007, grain producers throughout most of the country experienced the most profitable year they've had in history. And 2008 will on average also be the most profitable — exceeding 2007. The challenge will come starting in 2009 as expenses are now rising rapidly, also going into a new plateau.
The increasing price of fertilizer, seed, chemicals and farm equipment has accelerated as fast as the grain market. An even faster acceleration has occurred in the value of farmland and the cash rents associated with renting that land. Higher price levels bring higher risk. The decision-making process is now much more complex than ever in history.
MANY PRODUCERS THOUGHT when ethanol plants were being built that marketing would be easy. Just sell the grain at $3.50/bu. and forget it. What most people didn't recognize at the time was that $3.50 was cheap. Not only have futures prices become much more volatile, but so have basis swings. In many areas of the Midwest, basis is actually no better now than it was five years ago. In other areas, it's much tighter. Because of the wide swings in futures as well as the wide swings in basis, marketing decisions have never been more complex.
Now add the volatility of your input prices to the decision-making process. The huge swing in the price of nitrogen alone in the past 12 months would make anyone dizzy if you watched it on a daily basis. Buying at the wrong time or not buying at all could turn out to be an expensive decision or non-decision. The same is true for diesel fuel.
The bottom line: Many producers are enjoying the strong profitability of today's markets. If you're a large landowner, your net worth has accelerated and your biggest problem now is changing your estate plan to avoid the inevitable death taxes.
As in any volatile market, it will likely be best to make many small decisions rather than a few big ones. Locking in either the selling side or the purchasing side at the wrong time on a large percent of your sales or purchases could be financially draining.
Timing will be everything, but the only way to have perfect timing is with 20/20 hindsight. None of us can make decisions that way.
Locking in profitable levels on at least part of your production will certainly prove to be a prudent strategy in the months ahead. Continue to look forward in making your decisions and forget what you've done in the past. Concentrating on any errors in the past will unfortunately lead to missing opportunities in the future.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. Fora trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.