Cereal, oilseed, pulse and specialty crop prices can’t go up forever. What goes up rapidly often comes down even more quickly. Beware a big price correction.
I’m no market analyst, but I’ve been around the block a few times; and I don’t really have a dog in this hunt. Almost all of my meagre production was pre-priced, so I’m going to benefit little from the massive price escalation. Maybe this detachment from the market helps me remain circumspect.
Market analysts admit picking the top of any market is difficult and this has been an especially wild market ride. When the market correction comes, some commodities might drop a lot while others hold most of their value. However, a rising tide lifts all boats and the opposite is also true. When the market starts trending downward, everything could take a hit.
Prices may still settle out at historically high levels. It isn’t like a bunch more production will magically be created. However, the world is a big place and buyers will gravitate to where they can get the best value. It’s that demand side of the equation that will generate a correction.
As prices quickly rise, a producer’s natural reaction is to lock the bin doors and ride the market higher. Buyers push prices up trying to pry grain from growers’ hands to meet their commitments. Big price moves can be an indication that very little product is actually being priced.
End users will want the product they committed to purchase, but will they be willing to pay the dramatically higher values being quoted when it’s time to purchase more? In some cases, they’ll look for cheaper substitutes or they’ll rely on what they have stockpiled until a market correction occurs.
Selling into a rising market means you’re unlikely to hit the peak, but it certainly beats selling into a falling market. That can be like catching a falling knife. Panic selling brings many regrets.
As the old saying goes, bulls can get fat and bears can get fat, but pigs just get slaughtered. Being greedy is a fine business attribute to a point, but being too greedy can be costly.
At current prices, even a mediocre crop can be profitable. A 20 bushel crop of canola, peas, lentils or durum is not usually something to brag about, but they are profitable with canola and durum in the $20 a bu. range, peas at around $16 and red lentils at more than 50 cents a pound.
Revenue from that 20 bu. crop might now exceed the expectations from your pre-seeding calculations, but it can be difficult to hit the sell button when many prices are regularly ratcheting higher.
When buyers talk of a market correction, the tendency is to discount their advice. After all, it’s in their interests to talk the market down and get producers to sell. However, they have a better perspective than growers on market demand and what price levels will be sustainable. Don’t totally discount what they have to say.
On many crops, a 20 or 30 percent correction would still leave an attractive price, but it would take a lot of money off the table.
Will prices be even higher next week? I don’t know. Will prices be higher a month from now? Maybe, but maybe not. Will prices be higher two months from now? For some commodities, perhaps, but on many commodities, I doubt it.
Kevin Hursh is an agricultural journalist, consultant and farmer. He can be reached by e-mail at email@example.com.
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