Author: Dailyfutures.com

Article:
In a few short months, the ground will thaw and planting will
begin. Along with the change in season will come an abundance of
market opinions (mostly bullish) about where prices are headed
this year. Before you get swept away with all the different
analyses, there are six things about grain prices that you
should keep in mind every year. One: Farming is one of the most
competitive business environments that you will ever find. There
are thousands of producers of various sizes, none of which has
any clout when it comes to haggling prices. The grain producer
is the prime example of a "price-taker" and that fact alone
tells us that over the long haul, grain prices will spend most
of their time near or below the costs of production. Two: Thanks
to human nature, the price cycle for grains is strongly
asymmetrical, meaning that prices spend far more time in
downtrends than they do in uptrends. When prices are good,
producers are eager to expand production and the whole ag
industry is eager to help them. The rush to produce more is what
kills an uptrend. On the other hand, when prices are bad, there
is no hurry to cut production. Nobody wants to fire workers or
auction off equipment until they absolutely have to. Without a
government program, there is no incentive to cut back acres. It
takes much longer to bring about the behavior that ends a
downtrend. Three: Like it or not, subsidies that are above the
cost of production encourage more production, larger grain
stockpiles, and longer downtrends. As a good example, look at
the cocoa market. Cocoa prices have been in a downtrend for 24
years, thanks largely to the subsidy policies of the Ivory
Coast. You should also notice that governments are most likely
to abandon those subsidies when prices are at their worst. It's
easy to get political support for subsidies when the cost is
small. It's another matter, when grain prices are in the tank
and the cost of those subsidies becomes expensive. Four:
Traditional economic theory relies on the consumer taking
advantage of low prices to bring balance to the market. However,
low prices, in and of themselves, do not stimulate enough
consumption to balance market forces. Show me a market with low
prices and a bearish outlook and I will show you consumers that
are in no hurry to buy. Why should they be in any rush when they
are expecting abundant supplies later? Let the other guy pay for
storage. Bullish market outlooks and a fear of tight supplies
are what stimulate market buying; not low prices. Five:
Producers want to hear bullish market outlooks early in the year
and there will never be a shortage of advisories that are
willing to provide them. It is only human to want to hear good
news. Unfortunately, bullish outlooks early in the year
discourage producers from hedging their risks when the costs of
doing so are advantageous. Six: When it comes to predicting the
future, there are no experts. War, weather, disease, government
policies, and international crises all have huge, unpredictable
influences on market prices. It doesn't matter who you are or
how much you think that you know, the market will always be a
source of surprise to its participants. It is not wise to leave
yourself vulnerable to anyone's prediction. Soon you will be
hearing about how this will be the year that soybeans hit $7.00
and corn goes to $3.50. Who knows? Maybe this will be that one
year when farming really pays. But just in case it's not, it
would be wise to look at your options, consider the six things
above that are true for grain prices every year, and protect
yourself from the risk of lower prices.

Dailyfutures.com. February 12, 2002.

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