Coping with crop price vo l ati l it
y
Wide crop price spread possible in 2009-10.
Crop prices may not be quite as
volatile as they were last year but
that doesn’t mean feed companies can escape dramatic upturns and
downturns. Far from it. “There is potentially a very wide, $2/bu. range for corn
prices for December Chicago Board
of Trade futures, anywhere between
$3.50 and $5.50/bu.,” says University
of Illinois economist Darrel Good.
If energy prices remain low, the global
economy remains weak and there are no crop
fears, prices are likely to remain on the low
end. But if higher energy prices, a stronger
economy and fears of lower crop yields materialize, prices could be on the upper side,
Good says. “One or even both of these scenarios could play out this year,” he says.
“Although a great deal of further empirical
investigation is needed, there are strong reasons to think that increased volatility of global
grain prices is here to stay, and may grow
further,” says Christopher Delgado, strategy
and policy advisor for the World Bank.
Spot cash corn prices in central Illinois
8
7
6
$/bu.
5
4
3
2
1
9/7/06
3/7/07
9/7/07
3/7/08
9/7/08
3/7/09
Corn prices have deflated substantially from last summer’s highs.
More turn to spot market
After getting burned with hedging programs last year, a number of feed companies interviewed by Feed Management in
recent weeks say they are changing how
they purchase grain. Now, these companies
say they are buying grain inputs in the spot
market rather than extensive hedging.
While such a view is understandable after last year’s price surge of corn and other
grain and oilseeds, and the following crash,
the abandonment of using futures contacts
concerns Richard Brock, president of Brock
Associates. One important question, he
says, is “will futures contracts exists three
years from now?” Without futures contracts
that allow both feed companies as well as
farmers to offset their commodity price risk,
Brock believes there would be more price
volatility, not less. The result, he says, could
be more feed company consolidation.
Brock places much of the blame for last
year’s grain price volatility in futures contracts
at the door of lax regulation commodity index
funds by the Commodity Futures Trading
Commission (CFTC). Last June, he says,
one commodity index fund totalled $142
billion — 66.9% in energy, 13.8% in grain, and
5.6% in livestock. Such a huge investment in
grains was largely responsible for the last run
up in grain prices, he says. As a result, prices
took a harder crash when funds liquidated
much of their positions. It wasn’t just that
commodity index funds were heavily invested
in grain futures, Brock says, but that they
were heavily weighted in net long positions.
The lion’s share of the problem was created,
he says, by the CFTC not enforcing position
limits. As a result, now, he says, “cash is not
trading its own fundamentals.”
Looking at this year, Brock’s bearish
scenario for maize is for prices to be $2.75
to $3.50/bu., his bullish scenario $4.50 to
$5.25, while his average scenario calls for
maize prices to be $3.70 to $4.30. With
lower acreage and low production, “prices
could be $6/bu., but a lot of bad things
would have to happen.”
$2.50/bu. corn?
Some are far more pessimistic on corn
prices. Bill Gary, who has been trading grain
since 1961 says in a Bloomberg article that
corn will probably tumble 31% to $2.50/bu.
agricultural markets,” says Pat Westhoff, co-director and crops economist of the Food and
Agricultural Policy Research Institute (FAPRI).
While corn futures prices topped near $8/bu.
last summer, they fell below $4 by November.
FAPRI projects the average farm corn price for
the crop to be harvested this fall to be $3.74,
and its models call for corn to average about
$4/bu. over the next decade. By 2017, FAPRI
projects that more U.S. corn will go to fuel than
will be fed directly to livestock.
On the oilseed side, Brock says that
“protein demand is still going to be good.” His
bearish scenario is for soybeans this year to
be $6 to $7/bu., his bullish scenario calls for
$8.50 to $10.50, while his average scenario
points to $6.75 to $8/bu.
FAPRI, meanwhile, projects soybean
prices to drop from $9.37 to $8.76 for the crop
to be harvested in 2009. Soybeans face lower
demand from poultry and livestock feeders.
Also, with lower global demand, soy oil prices
have declined sharply this year. More soy oil
will be diverted into biodiesel, FAPRI says.
Gary believes, however, that soybean
prices will likely drop 28% this year to $6.50,
which would be the lowest since April 2007.
Possible $100/metric ton trading
range for soybean meal
