Mathematically, it’s far more advantageous to protect corn prices incrementally now than to wait for the perceived home run that might not materialize.
By Mike Rusch, Stewart-Peterson Inc.
Articles about how producers’ emotions intertwine with pricing decisions seem to strike a chord. Several readers emailed me after my last column about "Why Active Management Beats "Set It and Forget It." The comments I heard were along the lines of, "That’s me. That’s how I think, and I know I need to do something about it."
So, I thought I’d offer a sequel. I could use this space to write about what we think the feed and milk markets are going to do; however, we get very few reactions from prediction columns. Opinions are a dime a dozen. Rather, we hear from readers when we talk about the psychology of pricing decisions. Today, let’s talk about making mathematical decisions about today’s corn and protein markets.
No one wants to talk about corn right now because it is at a multi-year low. In 2013, when corn hit $8.44, that was "exciting." Our phones were ringing and producers were seeking out help. Then the corn price began its cyclical bear trend. This month marks the 24th month that corn has been in its current bear trend.
While feed prices are relatively low, producers may find it more exciting to talk about other discoveries and other efficiencies: new technologies that trim costs or increase milk production over time. You may spend hours of time and significant investment to create a 2%-5% increase in efficiency that can translate into increased revenues over the course of the next few years. There is a sense of excitement when, over time, you measure your investment and see results.
Those things are all good. We simply want to caution you to take care of business when it comes to your No. 1 expense: feed. While everyone is excited about higher milk prices and the exciting opportunities they bring, it’s the perfect time to be quietly and methodically putting your game plan in place to protect these opportune prices. If you get complacent on your feed price management, you may negate all the effort you put into gaining production efficiencies through new technologies or products.
The corn market is getting to levels that are long-term attractive, and it is impossible to know where the bottom will be. For perspective, consider that the 2009 low was $3.02 per bushel and the 2012 high was $8.44 per bushel. We are at $3.85 as of this writing. At this time last year, corn demand surged back when the price fell below $5.00.
Chart Source: Stewart-Peterson Inc. and ProphetX
Mathematically, it is far more advantageous to be protecting corn prices incrementally now than to wait for the perceived home run that might not materialize. Singles and doubles add up over time and are less risky than swinging for the fences.
The protein market, while providing opportunity now, may still provide more opportunity. Soymeal historically tracks with or lags slightly behind corn (see chart). Soymeal has now begun falling to track more closely with corn. Now is a good time to be thinking about the price points you want to protect. Run the numbers at different price points, and determine the impact of decisions you might make in the future as the market changes. Doing this now helps you anticipate results, and avoid having to make decisions during the heat of a surprise market move. When you rehearse the decisions you plan to make ahead of a market move, and you understand the impact of each decision on your feed price, those decisions are easier to execute as things play out.
Now might not be the most exciting time to talk about feed; however, the market is offering opportunities to make decisions that will pay off over time. The payoffs can come in the form of cost savings, less hassle to find substitutions, and less scrambling when markets take unexpected jumps.
Create your own excitement with a consistent approach to feed price management that can be measured and celebrated in time.
Mike Rusch is an Ag Business Specialist for Stewart-Peterson Inc., a commodity price management firm based in West Bend, Wis. You may reach Mike at 800-334-9779, or email him at email@example.com.
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