Don't Get Run Over by Risk

This Business of Farming

Analyst says China, government policies move markets

Published on: April 4, 2013

"It's a great time to be in Ag, but all the easy money has been made," David Hightower told a group of farmers over dinner in Central Illinois last night. Now, with the future of farm programs uncertain, "farmers must learn to market grain and manage risk, and not get run over by it."

Hightower has offered plenty of opinions and advice over the course of 30-some years as a stock index analyst. As the founder of the Hightower Report, he has worked with some of the world's largest corporations on hedging strategies.  

He and his colleague Ken Smithmier shared insights on grain prices and global ag trends:

Over the next seven years China will spend billions to relocate poorer rural citizens to urban areas.
Over the next seven years China will spend billions to relocate poorer rural citizens to urban areas.

-Despite double-digit growth the past several years, China will spend billions to relocate 2 million rural and poverty-stricken villagers to urban areas by 2020. The Chinese government hopes the plan will relieve rural poverty; currently most Chinese peasants make about a third the income of urban counterparts. Hightower believes the resettlement plan is designed to clear out inefficient, one-acre farms to make way for larger, corporate-style agriculture.

-China has developed a "feed culture that is here to stay," says Hightower. He was at a meeting in China where over 800 feed companies were in attendance.  One man told him he was feeding 8,000 rabbits. Those are to eat, not to sell as pets. "China thinks they can control the price of corn and soybeans to some extent, and they don't want to be held hostage to other producers," he says. China's hog herd is now ten times larger than the U.S. herd.

-Hightower believes a 14 billion bu. corn and 3.5 billion bu. soybean crop is possible this year. But it will be hit or miss. If 98 million acres go to corn this spring, yields will be wildly variable because so many of those acres will be located where soil types and weather make yield prospects uncertain at best.  On the other hand, history shows that the U.S. rarely suffers four straight subpar yield years.

-Price discovery is now stretched all over the world. Commodities are undervalued, and they are becoming more difficult to produce. Last year's drought "put the livestock industry on its knees."

-South America rebounded from drought and is set to have record bean and corn crops, says Smithmier. "The problem there is infrastructure – Brazilian roads and ports are terrible," he says. "In some cases there is a two to three month wait to unload at ports."

-Iowa State now estimates that 72% of Iowa farmland is owned debt-free – one reason why we won't likely see a 'farmland bubble burst.'  On the other hand, "ethanol and crop insurance policy changes could be catalysts for sharp declines in land values," says Smithmier.

"Big production vs. big demand breeds volatility," Hightower sums up. "Volatility will be a fixture in the marketplace, but if you take the time to use options and futures combinations, you can make volatility work for you."