Grain and cattle producers certainly share some similarities right now, especially from a market perspective. Prices down, supplies growing, margins tightening or even going negative.
That, however, is where the similarities end. The grain market is the definition of the classical commodity market, whereas the cattle market is increasingly becoming differentiated. The grain market, though, is nearly perfect from a market transparency, liquidity and ability to manage risk standpoint.
The good and bad news for the grain market is that we know what it will take to raise prices. We will either have to see increased demand through reducing the value of the dollar or a growing global economy, or we will have to decrease supplies through acre reduction and/or weather disturbances. None of those seem likely in the short term, but the drivers and causes for the market’s direction are well known and well understood.
The good and bad news for the cattle market is that nobody knows how to fix it. We will have small increases in supplies for the next several years, but demand is improving. Risk management with the huge variation in basis is difficult and when coupled with volatility almost impractical.
The cow dynamics take longer to change but they also provide more long-term opportunities not only to differentiate our product but to expand margins. The grain market dynamics change much more quickly but it is almost impossible to separate the individual from the aggregate effects.
Someone asked me the other day about the value of diversification and whether I would rather be a grain farmer or cattlemen. I’m not sure the diversification argument holds as much clout, with grain and cattle moving more in synch than ever before, but they are certainly two sides of the same corn…uh, I mean coin.
Both markets have left producers frustrated in the results; ranchers are just more clueless about why the market moved and what the future holds.
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