The school of agriculture's dean of admissions was interviewing a prospective student, "Why have you chosen this career?" he asked.
"I dream of making a million dollars in farming, like my father," the student replied.
"Your father made a million dollars in farming?" echoed the dean much impressed.
"No," replied the applicant. "But he always dreamed of it."
The high commodity prices have been a boom for farmers. Land prices are up and incomes are at their highest levels in decades. You have to go back to the big grain spike of the early 1970’s. There is no bust in the farm belt, but even here there is talk of problems.
Floods in the Midwest will reduce the quantity that will be produced which affects income. Competition from Latin America in the export market has been strong even with a falling dollar. Financing is becoming a problem as lending standards across all products are tightened in response to the home mortgage crisis. Volatility is at the highest level in decades so any decision of when and how to sell is filled with risk. Selling crop forward is always an issue that can be filled with regret for any farmer.
Futures price for grains have been settling higher than the cash market, so the price the farmer receives at the elevator is not the same as what a farmer is seeing at the CBOT. Commodity markets have been under significant stress from the flow of new participants. This summer will also provide an interesting backdrop for the classic fight between hedgers and speculators. We have seeing margin increases on speculative positions which will change the dynamics of liquidity.
Unfortunately, whenever there are these price spikes, there are excesses in behavior. The lessons of one market usually will not carry over to the next, so bubble behavior in commodities should start to appear.
Monday's 3/31 USDA crop report will be interesting. Barron's has an interesting article this weekend on the Commodities markets. They cite the rising cost of fertilizer and it's impact on grains. On a different note, the corn based ethenol insanity must be stopped.
ReplyDeleteThe corn problem for consumers is the making of the government. we subsidize ethanol and look what happens, the price of corn shoots up. Yes, it provides some gasoline relief but at the expense of the price of meat and foodstuffs.
ReplyDeleteThe Barron's article is interesting becasue the complaint from farmers is that speculators will drive the price down. Now we see problems with speculators driving the price up.