If Not Hedged, You Are Speculating

Jerry Welch, Commodity Insite!
Call me at 406 -682 -5010
Ennis, Montana 59729

Follow me on twitter@commodityinsite

Based on all-time high ending stocks of soybeans and the most recent Cattle on Feed report from the USDA yesterday I thought it timely to post a chapter from my book, Haunted By Markets entitled, If Not Hedged, You Are Speculating. I wrote the chapter on October 8, 2004. Hope you find it of interest.


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If you are not hedged, you are speculating. And speculators generally lose money. That adage was coined in the 70s when the U.S. agricultural markets began rising and falling in violent fashion after decades of narrow, tight price ranges. The 70s were boom and bust times for the grain and livestock markets, the very heart and soul of American agriculture.


In the 70s, boom or bust markets were a result of a unique combination of fundamental factors never before seen. Those factors were a weak U.S. dollar, a rise in world demand for agricultural commodities and soaring energy prices.



It was the alliance of those forces that brought forth sharply higher and inevitably sharply lower prices for grains and livestock for over a decade. It was a period of roller coaster prices. The only other period comparable to the 70s in terms of price volatility is the period in which we now live. If you doubt that, consider what U.S. farmers and ranchers have endured over the past year. Grain producers have watched prices collapse as much as 45 percent after hitting multi-decade highs. Livestock producers have seen prices soar over the past two years but worry daily if they too, will soon fall victim to the same fate as grain producers.


There is one fundamental today, not quite identical to what was seen in the 70s. In fact, that is the one fundamental causing analysts to argue the U.S. ag markets will always remain on the defensive with high prices seldom lasting long while low prices linger longer than producers would care to see.


The one factor I am referring to is the US dollar that remains historically high in value. The dollar is not as lofty as four years ago but is nonetheless stout. The reason the dollar remains stout is because all White House Administrations and the Federal Reserve since the 80s have embraced a strong dollar policy as a means of fighting inflation.


As recently as late 99 and early 2000, the U.S. dollar was at its highest level in 16 years while at the very same time, corn prices were at a 15-year low, wheat a 20-year low and soybean prices a 30 year low. A year earlier, hog prices had slumped to a 64 (yes, 64!) year low while cattle prices were depressingly cheap. It was no coincidence the dollar was strong while the US ag-markets were weak!


This morning, amid cheering from rural America, signs emerged hinting the strong dollar policy may be ending. A widely circulated news article said Robert McTeer, the president of the Dallas Federal Reserve warned that, Over time, there is only one way for the dollar to go -- lower. Just for good measure, Mr. McTeer also talked about the theoretical possibility of a crisis precipitating rapidly rising interest rates and a rapidly depreciating dollar if and when the wider world stops funding the U.S. current account deficit.


The article also stated, Fed governor Ben Bernanke waded in by stating that the Fed will pause in hiking interest rates if the U.S. economy slows. It also emerged that President Bush spoke to his Chinese counterpart about currency issues, including Chinas plans to move to a more flexible exchange rate. Thanks in part to that eye-opening article, the U.S. dollar closed out the weeks trading at an eight month low, while energy prices closed at all-time historic high. The CRB index that is weighted towards grains and livestock ended at its highest level in years.

The U.S. dollar is no longer going to be propped up by those in power. Thus, a comparison between the 70s and today's environment is clear. Which of course means volatile markets are ahead where the key to success is marketing and not necessarily production.


Depressed prices will not last long. Not as long as the Fed and others in power allow the strong dollar policy that has hindered the ag markets since the 80s to be deposited in the trash pile of history. A weak dollar will underpin prices and set the stage for the next bull market as demand enlarges.


Be prepared to take out an insurance policy by hedging your production as markets boom and bust. Never forget that in times like these if you are not hedged you are speculating. And speculators generally lose money.


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Keep in mind the information above was penned by yours truly on October 8, 2004. If it appears a bit dated, it is!


Take the time to check out, Haunted By Markets that can be found at commodityinsite.com

Or give me a call at 406 682 5010


The time is 8:58 a.m. Friday, April 19, 2019

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