Pearson: This is the Friday, October 12, 2012 version of the Market Plus segment. Joining us now is Mark Gold. Mark, welcome back.
Gold: Nice to be back, Mike.
Pearson: We're glad to have you with us. We've got a couple of questions here from folks on Twitter. Peter in Ontario is asking, you always say corn and bean prices eventually go below cost of production. When do you see that happening again?
Gold: Well, that's a good question. I do believe that markets have highs and lows and that one of the functions of the market is to eventually drive prices under the cost of production to force out the inefficient producers. I still believe as long as supply and demand rules these markets I believe that is going to be the case. We've had incredibly high prices because of the drought. We've attracted certainly more acres in South America, more acres all over the world whether it is Russia, in the former Soviet Union, in Europe, Canada, we're going to see many more aces to get planted to try to take advantage of these high prices. What are we doing to the demand base at the same time? We're hurting the demand base. So the world is about to produce more of what the world wants less of tells me that there's some significant risk out there. And where will that price ultimately go is back under the cost of production. Now, when is that going to happen? I believe it's going to happen this time when we know that the South American crops are secure. They're off to a pretty good start. Both the Argentineans and the Brazilians look like they're going to have absolutely huge crops. Brazil could certainly push corn estimates to 80 or 83, with good weather I believe it could even go much higher than that. If we believe that Brazil has got a crop worldwide stocks are going to go through the roof and that's when we're going to force these guys out and get the cost under the cost of production and eventually things will turn around as they always do. But in the meantime I believe the market is vulnerable to those basic supply and demand fundamentals.
Pearson: And we'll get that news out of South America, December, January is when that will really start to firm up?
Gold: Yeah, the January, February timeframe you'll really have a good idea what their corn and bean crops are going to do. So between now and then can we stay relatively strong until we're sure of those? The biggest problem I see right now with the grain markets is the length of the fund long positions in meal, corn and beans. I think that's a problem for this market. Technically the market acts like a dog in my opinion. So are we going to push it far enough down right now? As we get through harvest we'd make some kind of seasonal low in here, we're going to get some kind of a bounce. The big question is how big is that bounce? Are we really running out of grain? Can this thing go to record prices? I don’t know the answer to that.
Pearson: All right. Another thing, as we're talking cost of production, as we look towards next year's crops with all of the unrest going on in the Middle East crude oil prices are going to be a huge factor. What should folks be doing to protect themselves from potential spikes in crude oil prices?
Gold: Well, that's a tough game to manage. Managing crude oil risk isn't cheap. I generally say if you don't have at least 2000 acres it's almost impossible to accept the risk on an options contract to justify the cost of that. So if you're a smaller farmer, 500, to 1500 acres, 20 years ago that wasn't a small farm but today it's getting a little bit smaller. It's hard to justify that expense. What I would say is that the crude oil prices will have a dramatic effect o ethanol. That will have a dramatic effect on corn prices. So if we see for any reason, if there is a change of regimes in Iran then you've got to immediately act to get some protection on your corn prices because in my opinion crude oil prices will absolutely tumble and that's not going to be good for ethanol and, again, we could see some lower corn prices out here. So that is the big impact, what is going to happen particularly in Iran and of whether there is a potential regime change there.
Pearson: All right. And with all that in mind and potential record crops where do you see input costs going into this next year? Should folks be looking to lock those in as soon as possible? Or should they ride it out and see what happens?
Gold: Well, we're going to plant an awful lot of acres next year. Seed prices, fertilizer prices, they aren’t going to get cheap any time soon I don't believe. Farmers have enjoyed incredibly high prices. I don't see anybody offering any discounts on fertilizer or seed any time soon. So I think they're just kind of having to budget in those current costs. Maybe they'll be at planting if we've got some lower prices maybe there will be some movement there. But I don't see that there's a real need to jump in and protect fertilizer with maybe a natural gas contract or with crude oil I don't see that at the moment. I think you've just got to kind of be leery. There's nothing wrong with doing it in stages. Try to lock in 25% now, 25% after the first of the year and then if you're forced to make a decision on top of that at least you're kind of managing those input cost risks which I think are important to keep an eye on.
Pearson: All right. Now we touched on this a little bit but Philip in Ontario is asking will we approach record corn and soybean futures prices again before spring 2013?
Gold: Well, I only wished I knew the answer to that. Unfortunately my crystal ball I left it back in Chicago. It's all going to center on two things -- if there is any kind of drought or production problem in Brazil then we're going to record highs, no question about it. If the Chinese continue to buy beans at this rate and we don't see any improvements in the yields and these carryouts remain tight and if China continues to be a strong buyer of beans, beans can certainly move to $20 or $21. When I went to the University of Illinois in ag school I had a professor by the name of Thomas Hieronymous and he used to say, Mother Nature takes care of surpluses and takes care of deficits. And I'm going to go -- Tom was a pretty bright man and I'm going to stick with Tom and I'm going to say Mother Nature is going to take care of this deficit by giving us some good rains not only in the southern hemisphere but up north as well. So I believe that the odds of making new highs really is going to rest on what happens in South America more than anything else. If we believe that we've got good supplies there and then we're looking at American farmers planting who knows, 96, 97 million acres of corn and let's say we're at trend line yield, all of a sudden we are back at $3.50 corn and $9.00 beans. This thing can turn, as American farmers have been around as long as I have, you can know that this thing can turn on a dime. And once we believe that we've got those supplies from South America secured this market is incredibly vulnerable.
Pearson: And that brings us back to the point you made earlier, looking at new crop prices out there and maybe locking in some.
Pearson: Certainly trying to protect them.
Gold: As this 2012 crop got incredibly high we moved the 2013 prices up to very strong historical levels. We were talking briefly about the cotton. A year and a half ago when cotton went to two cents that dragged up that new crop to about 120, I was pleading with farmers to take advantage of that. At the time you could buy $100 puts for two cents that wound up being worth an awful lot of money. The only reason that these new crops go to these levels was because the old crop dragged it up there and then when we get more production and lower demand prices go right back down again. Usually it is within eighteen months of those highs that you do get back under the cost of production. So I think that's something that you've got to be very keen about. Wheat, corn, soybean prices are all for the 2013 crop at very good historical prices. Let's not watch this turn into mush once again. Let's do something to protect it and manage the risk.
Pearson: All right, be smart out there.
Gold: We try to be.
Pearson: Thanks so much, Mark. Glad to have you with us this week.
Gold: Thanks, Mike.
Pearson: Have a great week.