Bismarck Farm and Ranch Guide, ND
05-11-07
Commodity market volatility likely in fuel-driven economy
Our Views
While you are busy with fieldwork and planting, take some time to think about your marketing plan.
Is your plan still up-to-date with changing forces affecting the market?
Exports and livestock feeding are important demand forces, but another major factor currently affecting the ag commodity markets is the price of gasoline and its implications for ethanol.
Following the 2006 election and then a winter reprieve with prices down to $2/gallon, gasoline prices have now started to rise again - and are expected to continue to rise through the summer months.
In late April San Francisco had the highest average retail gas price of any major U.S. city at $3.37/gallon, and that recently spiked to $3.59.
As of the end of April Minneapolis had the lowest average price at $2.65/gallon. The Minnesota Legislature is likely to pass a dime/gallon gas tax increase this session, translating into a price of $2.75/gallon.
With gas prices not far from $3, ethanol plants should be able to compete.
Ethanol developers will continue to invest and build more ethanol plants that use corn when retail gasoline is priced at $3 or above.
USDA released in March the “Feed Grains Backgrounder” that says corn very clearly faces “unprecedented demand conditions.”
“The size and speed of the expanding use of corn by the ethanol industry is raising widespread issues throughout the U.S. agricultural sector,” the report states. “Corn use for ethanol is rising faster than corn use for feed and exports.”
The U.S. is expected to use more than 3 billion bushels of corn this year to produce 6-7 billion gallons of ethanol.
With cash corn below $4/bushel and gasoline prices at $3/gallon or higher, you can bet that more ethanol plants will be built, and the consumption of corn for ethanol production will continue to rise.
The report states that, “as more of the corn supply is devoted to ethanol production, there are concerns that less will be available for domestic and global livestock feeding.”
The U.S. is looking for a 12-13-billion bushel corn crop, a 3-billion bushel soybean crop, 3 billion bushels in wheat, plus other small grains, niche markets and enough livestock to feed the nation, and in some cases, the world.
As the upper limits of production are pushed, there will be times when the weather is not going to cooperate, and there are also soils that will not produce 150-bushel corn and 50-bushel soybeans.
With the potential for limited supply but plenty of demand, the commodity markets will move in a volatile fashion.
Here are some examples. The December 2007 corn futures contract traded from a high on Feb. 22 of $4.29 to a low on April 23 of $3.64/bushel. Back in the summer of 2006, the December 2007 corn contract was in the $2.50 range.
November 2007 soybeans have traded $7.08-$8.43/bushel this year, as traders fought to win back acres for soybean production from corn.
We also have volatility in the other ag commodities. The September 2007 spring wheat contract at the Minneapolis Grain Exchange traded from $4.70 to $5.21/bushel in April alone.
The Chicago Mercantile Exchange nearby Class III milk contract traded from $14.20 to $16.10 in March and April.
Throughout the first four months of 2007, the June lean hogs contract traded $70.90-$79.05.
June live cattle traded from $88.25 to $99.82, and May feeder cattle have traded from $93.50 to $113.25 this year.
John Lawrence, Iowa State University livestock marketing economist said that by late April, lean hogs and live cattle contracts had increased by more than 10 percent and feeder cattle had increased in value by 20 percent from lower values earlier this year.
“Ten and 20 percent price swings are not uncommon,” said Lawrence, “But it is a lot bigger change when the price levels are as high as they are now.”
The markets are volatile this year, and while that can be frightening, farmers can also use volatility to their advantage.
By making marketing plans and using hedging tools, farmers can lock in some profitable prices. Hopefully farmers can use volatility to lock in affordable input products, as well.
It's not easy to lock in profitable prices or affordable inputs, but by using a marketing plan, watching the market, and having a little bit of luck, producers may have opportunities to make a profit.
Farmers have to be smarter than ever.
One thing is very likely - when gasoline prices are high, grain and livestock prices are going to be volatile.
Hopefully producers can use that knowledge to update marketing plans and lock in profitable prices.