William (Bill) Plummer has spent more than 40 years in the futures industry. It was an edge he saw in the egg market that first drew him to the futures markets in the 1960s as an egg price analyst. He has been trading ever since.
Plummer worked in various brokerage positions throughout the 1970s and was a member of the Chicago Mercantile Exchange where he served on numerous committees. He was responsible for developing the commercial futures business for Drexel Burnham Lambert in the 1980s and directed its livestock trading group. He traded the proprietary livestock portfolio and developed hedging models for its institutional clients.
In 1990 he formed Frontier Risk Management, LLC, an introducing broker that advises institutional livestock concerns in building complex hedging strategies.
In 1991 he launched Range Wise, a fundamental discretionary commodity trading advisor (CTA) that trades livestock spreads and grain options. Range Wise has produced a compound annual return of 11.33% over its 20-plus years. Plummer has a unique view of markets, as well as a unique taste in art, as American contemporary art is a passion. He lives primarily in Aspen, Co., but we sat down with him in his Chicago office to talk about the fundamentals of ag markets and how they are changing.
Bill Plummer: There has been. The biggest fundamental change in my mind is [that] of the rate of growth in demand worldwide. World supply has grown on a more or less regular basis over the past 40-50 years. The factors that have contributed have been improvement in farming techniques, improvements in genetic seed stock; the yields have improved on a more or less regular basis. That has been one constant, an increasing level of available supply. Increase in acreage (particularly) in South America and, with the fall of the Soviet Union in 1989, vast amounts of land becoming available to more efficient farming techniques, are some of a variety of factors [that have] allowed the supply to grow.
We have had demand generally rising in a pattern that has been consistent with the growth of supply. The driving factors in demand are: General population growth, improving incomes around the world, starting with the fall of the Soviet Union. Prior, demand was driven by population growth. After the fall of the Soviet Union the vast areas that had been under the rule of centrally directly statist’s economies opened up. With that, there were improving income levels. From a demand standpoint the big event that took place was the Chinese government allowing a quasi-capitalist form of economics. That set off a revolution in China that took the most populous nation on earth from abject poverty to a [higher] standard of living. This revolution not only occurred in China but in India and parts of South America. So you had a revolution in terms of growth in personal income of vast [numbers of] individual human beings. The first thing that happens when a population comes from poverty/subsistence living and starts to gain disposable income is [people] move from a vegetable-based diet to an animal- or protein-based diet, [which] calls for more grain to be fed to more animals, which leads to more demand for grain. This began in the early 90s, [accelerated] in the 2000s and continues today.
With these two trends overlaying each other we would go through price advances that would be governed by weather; a crop failure would [occur] and we would have a spike up in prices. The spike in prices would cause more land to come into production and we would accumulate.
In 2003 the ethanol industry really got its legs under it. With government subsidies [and] a government mandate to blend a certain amount of corn ethanol with gasoline, the ethanol industry began to grow.
At one point the ethanol industry in 2003-04 consumed about 7% of the U.S. corn supply, and then 10% and then 15%. Today the ethanol industry consumes a little more than 35% of the total U.S. corn supply and next year it is forecast to consume as much as 40%.
Overlay food-based demand vs. world supply and add this dramatic increase [because of] ethanol, and all of a sudden you have a situation where the balance between supply and demand became precariously narrow. What separates this period that we are in now and the last 30 years is that [with] the rate of growth of ethanol and population, we are not going to be able to build the kind of huge stocks we previously were able to without taking prices to another level. That is the fundamental change. We have taken prices higher; the question is, ‘ have we taken them high enough?’ We don’t know the answer to that yet.
We know that in order for the USDA [predictions of] a 675-million-bushel carryover this year for corn [to be true], we are going to have to reduce feed usage significantly in the last half of this year. I am not sure we are going to be able to do that. The only area we may cut demand is in exports. Some of our [anticipated] exports could be replaced by the terrible quality of the Australian wheat crop, but we don’t know if that is going to be done. The real wild card is China. China says that they have plenty of corn but one would ask ‘why has China been selling large quantities of corn out of their reserves and prices are still at all time record highs? Why have Chinese industrial plants that make things from corn been prohibited from buying corn from farmers directly?’ If China comes into the marketplace, then that is a whole new ballgame, and we will take prices much higher. China is going to come into the game [as] an importer. The question is going to be, ‘are they going to import more this summer when our supplies are potentially tight or are they going to wait until we have our harvest and buy from next year’s crop?’ That is just kicking the can down the road. If they don’t buy it this year that means that we don’t get $9 corn this summer; we will just get it next year.