If you had a choice to buy livestock feed cheaply for immediate delivery, but all indications are that it would be cheaper next month, what would you do? If your answer is to wait, then you'd be doing what thousands of international buyers have been doing as U.S. corn, soybean and soybean meal prices plunged lower last fall.
The combination of the hard drop in the U.S. futures market and the 5% drop in the U.S. dollar during the last 30 days has taken international prices down to the lowest levels in 30 years.
U.S. soybean futures fell to a major low in July 1999 at $4.01/bu. With the U.S. dollar trading at 104%, the international price of soybeans was at $4.17/bu. In December 2004, nearby soybean futures at the Chicago Board Of Trade (CBOT) fell to $5.20/bu. when the U.S. dollar was trading at 81%. This translates to an international price of $4.21/bu., so prices were within 5¢/bu. of the major 30-year low posted in 1999.
If the value of the dollar continues to drop, international prices could still drift lower into the first quarter of 2005. The major long-term low in corn came in February 1987 at $1.42/bu. on the CBOT. At that time the U.S. dollar was trading at 101%, so the international price of corn was at $1.43/bu. In early December 2004 the CBOT corn futures fell to $1.91/bu. With the dollar at 81%, the international price fell to $1.54/bu. Corn was down to within 11¢/bu. of the lowest international price in more than 30 years.
However, if the dollar keeps moving lower, buyers may still wait.
In addition, many middle managers at large companies also face a dilemma when they want to buy ahead.
In fall 2003 I encouraged a veteran food and grain procurement buyer to get his corn, milk and soybean meal bought ahead for the first and second quarter of 2004. He agreed with my reasoning, but said he didn't feel comfortable taking the risk.
He said, “If I buy ahead and it works, it saves the company a lot of money. However, if I buy ahead and it doesn't work, it may cost me my job.”
I then understood why some of the largest end users do the worst job of buying inputs. It also shows the importance of respecting individuals who make marketing decisions in your business and making sure they have the flexibility to do what's right.
The U.S. farmer has to be aware of three key factors that will impact our ag exports and our competitive position in the global export arena:
The futures price. CBOT is still the dominant player in setting international grain prices.
The dollar's value. Right now our exports are competitively priced.
Freight costs. Currently, bulk ocean freight rates are at all-time highs. The cost to ship from the Gulf of Mexico to key Chinese and Southeast Asian markets has jumped to more than $70/metric ton.
Last year the cost to ship a bushel of soybeans from the Gulf to processors in China was about 22-28¢/bu. Now with freight at more than 52¢/bu., a large portion of our low dollar competitive advantage has been lost.
Lower fuel prices will help lower freight rates, but odds of returning to 22-28¢/bu. shipping costs in the near future are slim.
What To Do
Farmers will eventually benefit from the weaker U.S. dollar in increased exports and higher prices.
However, it may take a change of trend in the U.S. dollar and a drop in international freight rates to give foreign buyers a reason to get aggressive and start booking ahead.
With the huge yields most U.S. farmers had last year, be realistic in your price expectations for 2005. A lot of farmers sold too much too early last year. Odds are those farmers will hold too much too long this year. Don't be one of them.
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 St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected].