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.