No one has ever accused Congress of having good timing. If the farm policy of Freedom to Farm (FTF) had been enacted six years earlier, it might have worked. Now that the new Farm Bill is in place, we're once again in a position of global demand and economic growth; one where FTF would have worked.
I believe three economic factors combined to drop prices and wreck FTF's chance of working:
The super-strong U.S. dollar. As you can see in the chart below, it rallied sharply higher from 1996 into early 2002. This huge 35% rally in the dollar value made the U.S. the most expensive store in town and our export business really took a hit. Ironically, the month that the new farm policy passed was the same month that the dollar peaked.
The global economic slowdown. It started with the “Asian flu” in 1997 and culminated with the U.S. dot-com-bomb break in the U.S. stock market in 2001. Overall, this created a global economic slowdown and decrease in food demand. This drop in the global economy significantly damaged the ability of many nations to improve their diets and raise their standard of living. The false assumption coming into FTF was that global economies and demand would continue to improve. Finally, we are starting to see improving global economies — and U.S. ag export demand.
Large global crops. Favorable weather and improved seed and farming technology created huge supplies at a time of declining demand. The net result was burdensome global wheat, feedgrain and oilseed inventories. As demand starts to improve, supplies are beginning to drop — even as production increases.
The old FTF marketing rules that worked well the last six years were simple as you worked the Loan Deficiency Payment (LDP) system.
Sell early and sell often, especially if the new crop hedge locked in a price that was above your county loan level.
Consistently, the most profitable combination was to avoid the loan, make early sales, lock in the LDP, and get sold out during the first or second quarter of the marketing year.
Storage was usually a waste of money since large free stocks of corn, wheat and soybeans that had been LDP'd earlier were dumped into the market by the third and fourth quarter of the marketing year.
Selling your crop is much different with the new Farm Bill. Under the new policy, some rules have changed. In addition to the LDP, you now need to stay aware and market in a way that maximizes your Counter-Cyclical Payment (CCP). Some of the new rules are:
Be cautious about selling ahead. Not only do you need to beat the loan, but also make sure you are selling at a level that beats the market. Otherwise, your CCP income will fall.
Consider using the loan — especially if your County Posted Price (CPP) is above your loan level and no LDP is available. With a lot of farmers making this logical step, free stocks will decline and odds are the old fashioned seasonal rallies will again develop.
Use on-farm storage and make sales during the entire marketing year. This will be the new strategy that you should employ to maximize income and capture your fair share of the CCP under the new farm program.
Remember, where and when you sell will have a huge impact on your farm's profits in 2002-2003 and beyond.
For a free copy of our special report, How to Farm the New Farm Program, write to me at the address below, or e-mail me at: [email protected].
Alan Kluis is executive vice president of NorthStar Commodity Investment Co. If you have marketing questions or want more information, write: NorthStar, 1000 Piper Jaffray Plaza, 444 Cedar Ave., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected].