Time to Reverse Marketing Strategies

North Dakota risk management firm sees an end to bull market.

Published on: Jun 9, 2008

Ray Grabanski, president of Progressive Marketing, Fargo, N.D., says that the bull grain market is one to three months from ending and that it's time to reverse marketing strategies.

"It's time to reverse the strategies now, selling product in advance and not buying inputs, the opposite of what worked the past 21 months," he says.

Here's the latest market advisory from Progressive Ag, written by Grabanski:

The grain bull market has had a strong 20 month run higher, taking sunflowers from 10c to 30c, corn from $2.50 futures to $6.50, soybeans from $5 to $15, and wheat from $4 to $13. This was an amazing feat to propel grains to 3x their value in less than 2 years.

Today, no one can see any reason for a bear market to develop, so perhaps that makes it even more likely to occur! The contrarian view of the markets, in fact, would suggest this is exactly the time that commodity prices can top - when virtually everyone who wanted to buy them already has!

Lets look at some signs that may be suggesting that the grain markets (and perhaps even oil/energy markets) have accomplished what they needed to by taking prices 3x higher than they were less than 2 years ago:

1. Government decision makers are becoming alarmed at how much/how fast commodity prices have risen. This is now front and center stage to policymakers across governments all over the world. Consumer prices for food and energy dominate US presidential politics - even more now than the war on Iraq (the focus just 12 months ago). The greatest goal of many governments now is to control commodity/food price inflation - even governments who MAKE money exporting grain (Argentina, for example). Argentina's new President Madame Kirchner is trying to transfer wealth from those "rich" farmers to the rest of the country by TAXING exports of grain - at a higher rate the higher prices go. They are worried about food inflation in Argentine cities. As astounding as that sounds, they are actually killing their most prosperous industry (soybean production) to transfer wealth to their other citizens. Even in the U.S., we are recently completing congressional hearings on price manipulation in futures markets, and new CFTC rules on speculators because policymakers feel they are driving commodity prices beyond where they should be. Yet high prices cure high prices, and is the best fertilizer for creating surplus food production. But try telling policymakers that today, especially those trying to get elected!!!

2. Because government policymakers are concerned about high and rising food costs, they are changing policies to try to encourage more production. Even in the U.S., in the past two weeks government has opened up CRP land to cattlemen to harvest free forage to cut their feed costs. Right now, the 33 million acres left in CRP are now fair game to try to keep food costs down. And ethanol subsidies have been reduced via the new US farm bill (from 51 cents credit to 46 cents), and biofuel mandates are under consideration of being "waived". Governments have put traders on notice that they will make policy changes to try to limit further price improvement (have long speculators/hedge funds served their 20 month purpose, then, in focusing attention on commodity shortages???)

3. Ethanol, the prime driver behind heightened demand for foodstuffs, has gone from political darling to political devil - now responsible for much of the world's food problems and hunger suffering. Everyone seems to have forgotten it is also part of the solution to the world's energy problems. But alas, governments have bad memories and even worse logical minds (where is Spock from Star Trek when we need him???).

What the public does not want to admit is that we simply use too much energy, and need to find even more alternatives while at the same time CUTTING our energy use (Jimmy Carter was darn near hung for suggesting this, though, in our last energy crises). CUTTING our energy demand might in the end be the only solution long-term (along with more alternatives like solar, electricity generated water powered plants, and wind energy). But who would get elected by proposing a $4/gallon INCREASE in gas taxes??? Or a 100% surcharge tax on automobile purchases??? We need to cut energy demand, but woe to the politician who suggests such a thing to the American gas guzzling public.

4. Once "talk" becomes center stage of the problem of commodity prices, funds are close to accomplishing their goal of focusing on high commodity prices and solving the problem of underproduction and over-demand. "Talk" usually leads to "action," and once action is taken the shine might be off the commodity bull market. While the political shift against higher commodity prices has occurred, U.S. crop yield potential has improved dramatically from our poor start to the 2008 crop year.

Crop progress/conditions out Monday should put a damper on the sharp rally, as crop conditions of corn came out much better than expected at 63% germinated/emerged, down from last year's 78% but much better than the 54-64% projected by traders. Weather remains favorable in forecasts, and Ohio performed an amazing feat last week with a mostly open week of planting weather, planting 34% of their corn and 45% of their soybeans last week!

This was an astounding feat, and actually pushes Ohio ahead of average planting progress. Most other states also "caught up" to close to normal progress, with corn 95% planted vs. 98% average, and soybeans 69% planted vs. 81% average so this is getting closer to an average planting year now, not terribly late. The corn is developing about 7-10 days behind average, but the next 2 weeks are forecast to be warmer than normal for most of the Cornbelt, with mostly average precipitation so the weather forecast is likely to lead to a further improvement in crop conditions.

This week hard red spring wheat conditions improved a huge amount, up 5% from last week to 57% germinated/emerged still behind last year's 75% but the improvement is large. With more good rainy/cool weather for this cool season crop this week, it's likely to see an equal improvement next week (and the next two weeks if the extended 6-14 day forecast of cool/wet is correct). Even with heat in hard red winter wheat country last week, Pro Ag yield models jumped another 0.35 bu/acre, now at the highest level of the year and implying a bumper winter wheat crop after a poor start last fall.

Pro Ag is getting more and more bearish as the 2008 season turns around to more normal planting progress and dramatically improving crop conditions. Its starting to look more and more likely that 2008 will be a average to above average crop yield potential, so the bull trend could come to an end this summer, and soon (the next 2-4 weeks???). If so, that would end a 20 month bull market that has been impressive to say the least. It might be time to advance sales significantly in grains.

Overall, Pro Ag thinks the inflationary cycle in commodities may be 1-3 months from ending (even in crude oil), so its time to reverse the strategies now, selling product in advance and not buying inputs (the opposite of what worked the past 21 months). Could fertilizer prices DROP 30% in the coming 6 months??? If they drop at all, fertilizer companies may not sell another stitch of fertilizer for another year as most farmers have already purchased the next year's supply. BEWARE! The trade winds appear to be changing!!!

For more information, contact Grabanski or Progressive Ag at 800-450-1404. His column carries the following disclaimer: The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. The opinions and recommendations contained are based on our judgement and do not guarantee profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures.