While a seat belt might be a necessity, about the only safety net farmers have during a new era of crop values and volatility is a marketing plan with flexibility. Grain prices are marching to a different drummer, and the pace has picked up considerably. But before you can develop a marketing plan for today’s prices, the change in the market has to be well understood.

Agricultural economist Scott Irwin at the University of Illinois assessed the personality change in the commodity market, and offered several findings during a series of recent presentations:
1) From January 1947 to January 1973, the average monthly price of corn was $1.28. Between 1973 and 2007, the average was $2.42. Corn price action since has indicated prices will likely range from $6.70 to $3.00 with a $4.60 average price.
2) From 1947 to 1973, the average price of soybeans was $2.63, but that rose to an average of $6.15 from 1973 to 2007. Currently, soybeans are in a new channel ranging from a $17.56 high to a $7.51 low and $10.58 average price.
3) For wheat, prices averaged $1.77 from 1947 to 1973, then average $3.74 until 2007. Since then wheat prices have indicated a range of $10.15 to $3.30 with an average of $5.80.
4) For hogs, the period of 1947 to 1973 saw a $19.18 average monthly price. Between 1973 and 2007, the average climbed to $44.74.
Irwin says his price analysis points to several factors that have a place in writing marketing plans.
• Evidence suggests that prices are likely establishing a higher average
• $3 corn, $8 soybeans, and $3.50 wheat are not inconsistent with new price range
• Prices can quickly rebound to much higher levels
• Concern: Long-lasting, world-wide economic contraction.

Irwin draws a close parallel between the price action of weekly crude oil futures and the price of corn bid by ethanol plants in Iowa. He says the relationship is about 75%, when those two commodity prices were compared each week of 2008. Therefore, the prices of crude oil, gasoline, ethanol and corn are linked. Specifically, there is an 85% correlation between weekly crude oil futures and gasoline futures, a 62% correlation between weekly gasoline futures and ethanol prices at Iowa refineries, and a 66% correlation between corn and ethanol prices at those Iowa plants.

Irwin says the market volatility can be traced through the price linkage, and knowing ethanol prices can be beneficial in knowing what corn prices may do at ethanol refineries. Based on gross revenue of ethanol at $1.50 per gallon and distillers’ grains at $120 per ton, gives an ethanol plant a $5.26 gross revenue per bushel of corn refined. Production costs would be estimated at $2 per bushel, meaning the maximum price the plant could pay for corn would be $3.26 per bushel.

If ethanol is dominating the value of corn, and other grains are keyed to corn prices, then ethanol values can be used to determine the potential price range for other commodities. Irwin says a $1.50 ethanol price equates to a $3.34 corn price, an $8.17 soybean price, and a $4.17 wheat price. Each 10¢ move in the price of ethanol would be a 40¢ move in corn prices, a $1 move in soybean prices, and a 50¢ move in wheat prices.

Therefore, Irwin says:
• Ethanol processors are the marginal bidders for corn in the short- to intermediate-run.
• Volatility in energy markets is transmitted directly into agricultural markets.
• Each step of the energy chain between crude oil and corn is a source of risk.
• Energy policies will play a key role in determining ethanol prices in 2009.

Summary:
Corn, as well as soybeans, and wheat, are economically linked to each other and to the ethanol market, which means prices of those commodities can be traced to the crude oil market. Commodity price volatility in the past year has been the result of the crude oil linkage, and indicates a new era of price levels and market volatility. Creating a grain marketing plan with the price relationships of crude oil and ethanol can be accomplished, since energy prices and energy policy will be major drivers of the grain markets.