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Understanding Your Corn Market Price Risk

May 21, 2014
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Market year average prices influence the payment levels federal crop insurance programs, and therefore help farmers understand the price risk they face.

By Gary Schnitkey and Darrel Good, University of Illinois

Market Year Average (MYA) prices enter into payment calculations for Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC), two commodity program alternatives available in the 2013 Farm Bill (see here for more details). The distribution of MYA prices will influence payment levels under both programs. Hence, quantifying the potential MYA price distributions is important for evaluating choices between commodity programs. Moreover, quantifying MYA price distribution aids in understanding price risk farmers face. Herein, the distribution of MYA corn prices is quantified based on historical price variability. Based on this distribution, PLC payment rates are estimated.

Market Year Average Prices

Figure 1 shows Market Year Average (MYA) prices from 1947 through 2013. These prices represent cash prices received by U.S. farmers. They are calculated by the National Agricultural Statistical Service (NASS), an agency of the U.S Department of Agriculture. Since 1985, the MYA price for corn represents the quantity-weighted average of prices received from September through August. As a result, the 2013 MYA price of $4.65 shown in Figure 1 is a projection, as the 2013 marketing year has not come to an end.

Click image to view larger chart.

figure1 051614

 

The distribution of MYA price is estimated based on a three step procedure. First, stable price periods are identified and price means are calculated for each period. During these stable periods, prices varied but did not trend up or down. Second, yearly price deviations from those period means are computed, yielding price deviations for each year. Third, a future price distribution is projected based on these historical price deviations using a projection for the future MYA price. This procedure is applied to corn in the following three sections.

Periods of Corn Prices

Price periods since World War II are largely associated with changes in demand. There was a period of relatively stable prices from 1947 through 1972 in which prices did not trend up or down, but exhibited variability around a mean of $1.28 per bushel. This period of non-trending prices ended in 1972.

In the early 1970s, exports of corn increased, leading to a higher corn price level. From 1973 through 2005, MYA corn prices averaged $2.36 per bushel. Similar to the 1947-1972 period, prices did not trend up or down between 1973 and 2005, but exhibited variability around the $2.36 per bushel mean.

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