farmgate: Market Your Grain With Confidence, Not A Grimmace
Does it seem there is excessive volatility in the grain market? Wheat make a limit up or down move at least once per week, and the corn and bean markets certainly don’t move in fractions of a cent anymore. The higher the price, the more amplified the moves in the market. If you happen to have grain to sell, you are not only lucky, but challenged on how and when to do it.
The market volatility is quite intriguing and stems from all of the outside forces tugging on the grain markets. The energy markets are driving corn and bean prices and world wheat shortages are pulling wheat upward according to Marketing Specialist Mike Woolverton at Kansas State University. His December 14 newsletter says much of the current dynamics were rooted in action by the Federal Reserve Bank to lower interest rates. That caused the value of the dollar to fall in its relationship to other currencies, and since crude oil is quoted in dollars, the price of oil jumped upward taking ethanol and soydiesel up with it. The Fed action was short of what the stock market wanted, so a sell off in equities caused investors to buy commodities and the resulting demand drove grain prices even higher.
Last week’s USDA Supply/Demand Report tightened US and world grain stocks further and that created more strength in the market for corn, beans and wheat.
1) Corn ending stocks are currently comfortable at nearly 1.8 billion bushels.
2) Wheat ending stocks are the lowest in 32 years and export demand continues at a high level, with the appearance of panic buying by some foreign nations which are also paying record high freight rates to obtain wheat.
3) Soybean stocks were lowered to the point the US will have only a 3 week supply when the marketing year ends, and despite a record South American crop, the global supply will be insufficient until the new US crop is harvested.
Woolverton says market volatility can be expected to continue, and producers should take advantage of the opportunity to price, not only the 2008 crop but the 2009 crop as well. He says if you are using the futures market, beware of huge margin calls, or as an alternative, sell in small lots and work with your elevator to hedge for you and absorb the margin calls.
How much volatility should you expect? Market Specialist Jim Hilker at Michigan State University has calculated price probabilities in his December 7 newsletter.
1) Corn. Hilker says there is a 50% chance the corn market will be above or below $4.20 by July, and there is a 10% chance of the price being below $3.21 and a 10% chance of it being above $5.52. “What this is saying is that there is a more downside risk, but a higher chance of very high prices compared to today than very low prices.” Storing until summer means you have to subtract storage charges, lost interest, and the basis. For new crop corn, December futures are $4.36 and Hilker says there is a 50% chance of it being above or below $4.20 at harvest, with a 10% chance it could be below $2.96 or a 10% chance it would be above $5.99, which means an 80% chance of it being between those.
2) Wheat. There is a 50% chance July futures will be above or below $7.50 says Hilker. He says there is a 10% chance it will be above $10.39 and a 10% chance of it being below $5.42, or an 80% chance of it being between those two levels. He says due to the large variance in wheat basis, look at summer 2008 forward contracts instead of hedges.
3) Soybeans. Hilker says there is a 50% chance that July futures will be above or below $10.96, with a 10% chance the price will be above $14.45 or below $8.34. For new crop soybeans, Hilker says there is a 10% chance the July price will be above $13.87 and below $7.23 per bushel, with a 50% chance it will be above or below $10.00.
Summary:
Market volatility offers opportunity for profitable grain sales, and various financial and energy markets are certainly creating volatility in the commodity market. Corn and beans are being driven by energy prices, which are a function of the weaker dollar. Wheat is in short global supply with panic buying keeping prices up. Farmers who have the opportunity to price old and new crop grain within the volatile price environment should beware of the potential price range, not only the midpoints of the range, but the upper and lower ends of the price range.
Posted by Stu Ellis on December 17, 2007 12:51 AM to farmgate