Rather than feel total elation at record-high commodity prices, Gary Jamerson is
apprehensive. In one day at the end of February the price on wheat swung $2.41 a
bushel, dropping initially $1.35 then surging up $1.06.
"A farmer can't play that kind of game," says Jamerson, who runs a sizable
operation with his brother Larry in west Tennessee and northern Mississippi
growing corn, soybeans, wheat and purple hull peas.
"This is the result of speculation, not supply and demand. It's not helping the
farmer, and it's not helping the American people."
Perhaps not surprisingly, Jamerson's fear is being shared by thousands of
farmers as well as hundreds of traders, bankers and grain elevators and
companies across the country.
Huge market swings driven by non-ag investment in the commodity markets are
taking everyone for a ride they didn't necessarily ask for. So much so that a
number of elevators and grain companies have shut down pricing grain beyond 2008
because the volatility is so risky.
How risky? The elevator to whom Jamerson sold his wheat was forced to maintain
its futures position on his crop by paying a $375,000 margin call. That's just
one grower's crop—one margin call. Jamerson exhales: "How much of that is going
on out there?"
Enough that "some elevators are not offering grain contracts beyond 2008," says
Dan Basse, president of the Chicago-based commodity analysis firm, AgResource
Co. (www.agresource.com). "No more forward contracts and hedge-to-arrive
contracts for 2009 or 2010 in some cases."
WIDER BASIS. Given the circumstances this shouldn't be surprising, says Basse.
"The price of capital [the commodities] has gone up so much that lenders,
elevators and grain companies are being stretched to their credit limits," he
adds.
Other than cutting off future price risk by not dealing with future crops, "the
only way to hedge some of that risk is widening the basis."
And widen it has. Jamerson, who isn't that far from the Mississippi River, says
the local price for wheat was $1.50 less per bushel than the cash price. (The
difference is the basis.) His situation isn't unique, though that large a basis
is attention-getting.
Dave Dvorak, who raises corn, soybeans and specialty crops in southeast Iowa,
says his basis "used to be the best in Iowa, next to the Mississippi River. Now
several areas close to ethanol plants have better margins."
When we spoke in early March, Dvorak's basis on corn was 42 cents under the
market price while soybeans were 75 cents. In past years his corn basis might be
10 cents under while soybeans might average 15 to 20 cents.
Whatever trouble the wide basis causes is made up for, in Dvorak's case, by
increasing premiums for the specialty crops he grows. Contractors, according to
Dvorak, have to keep pace with basic commodities "because any yield drag or lag
becomes much more important in deciding what crops to grow."
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UNBALANCED MARKET. That high commodity prices tend to widen the basis is a
market basic, according to Darin Newsom, senior commodities analyst with DTN,
the parent company of The Progressive Farmer. But that hasn't consistently held
true since 2005 due to "noncommercial speculative" trading in commodities, says
Newsom.
The weak dollar combined with the rally in commodities has generated "an influx
of money into this market not related to underlying cash situations," says
Newsom, "creating a market completely out of balance."
Producers, local terminals and local merchandisers can't afford to hold short
hedges when the market is so volatile. As a result, crop end users are holding
more of the grain.
"We can't really use our old notions of what a weak or strong basis is," says
Newsom. "We have to look at the underlying cash price."
With cash corn at $5, soybeans at $12 and wheat over $20, a grower has to "stay
out of the futures." Similarly, he believes that even options are too expensive
to consider.
It's not like many producers can still actually take that much advantage of the
present cash price, says Tennessee's Jamerson. If a farmer had wheat to sell
he'd have done it when the price hit $7 or $8 a bushel. "[Most] pulled the
trigger and sold the wheat then,"
he says.
VOLATILITY CREATES CAUTION. In South Dakota this past winter, Ralph Nelson was
dealing with "huge margin calls" on corn futures contracts as general manager of
the Watertown Cooperative Elevator.
Fortunately, "the basis has narrowed enough to compensate for the margin calls
I've got on the corn market." That is, the co-op's narrow area basis is paying
off—enough to make up for futures contracts that demand more margin money
because the price of the commodity keeps rising.
Nelson confirms that as of early March some processors, like one in the area
that buys soybeans, won't even bid now for May, June or July delivery, so great
is the potential volatility. And they certainly aren't looking to buy beans for
2009.
It's a time when "you want to bank with people who know the grain business,"
says Nelson. In that regard, the Farm Credit System's CoBank, which lends to
cooperatives, has been understanding. The Watertown Cooperative's seasonal loan
from CoBank this year shot up from $10 million to $21 million.
In the typical world, Nelson would expect commodity prices to go down this
summer with the large number of acres scheduled for planting.
"But we can't afford any blips," he says. Increased demand (from what it already
is) and/or a drought scare could make for a "wild summer. If you go three days
limit up and get rain, then the market goes down again. It's really not that
fun."