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Corn at $4 or $10: Plan Ahead for Both

May 13, 2013

This spring's planting delay has created more 2013 uncertainty. Be aware of the possibilities to manage both your feed and your milk prices.

Patrick PattonBy Patrick Patton, Stewart-Peterson Inc.

If April showers (and snow) bring more uncertainty about 2013 crops, what does uncertainty bring? For dairy producers, it can be ongoing uneasiness or a set of strategies that cover your feed needs no matter what the markets do.

We’re still preparing our clients for a potentially wide price range for 2013 corn and soybeans. Corn could be $4 or $10 in 2013, and soybeans could be $269/ton or $476/ton in 2013.

"Oh, that’s helpful," you might say. You might like a little bit narrower price range to use in your planning. First, I’ll provide perspective on the wide ranges, then I’ll provide some suggestions for avoiding the stress of a potentially wide swing.

A simple historical analysis helps us understand what could happen to feed prices this year. If we look at price rallies and declines on a percentage basis from year to year, we see the following:

• Since 2006, the average percentage rally in December corn from the first trading day in January to its contract high is 36.8%.

• The average percentage decline in December corn price from the first trading day in January to its contract low has been -19.3%.

The table below displays the average, maximum and minimum percentage rallies that the December corn and December soybean meal prices have seen from their respective closing prices on the first trading day in January.

S P chart   5 13 13

Applying this analysis to 2013,we start with the December 2013 corn futures contract, which was $5.92 on the first day of trading in January. Using the average percentage rally of 36.8% to the contract high would suggest a risk of corn rallying to $8.10/bushel before 2013 is over. The maximum percentage rally seen of 66.4% would say a price of $9.86/bushel is not impossible.

On the downside, the average price decline of -15.1% to the contract low would say that $4.78 December corn is possible, and the maximum percentage decline of -39.6% to the contract low would say that $3.58/bushel December corn is possible.

This analysis shows that an extreme price swing cannot be ruled out. Now let’s factor in what is currently playing out in the market:

While there are many factors that move prices, the major driver right now is weather. Everyone is nervous because of delayed planting and the potential for higher feed prices if we have another year of poor crops. Planting being the first hurdle, we were only 12% planted as of May 5 when our five-year average is nearly 50% planted by this time. This has happened nine times since Stewart-Peterson opened its doors in 1985. Of those nine occurrences, yields ended up below the 10-year trend line seven times. This would suggest lower yields, lower ending stocks, and higher prices as 2013 plays out.

On the other hand, in 2009, planting pace remained behind normal throughout the planting season, and then near-perfect growing conditions resulted in record yields.

What if that happens again this year? Could it? Well, using a very conservative yield estimate of 146 bu. an acre, and also conservatively estimating that farmers plant 1.5 million acres fewer of corn this year as a result of late plantings, you can still build a case for increased ending stocks for the 2013 crop. Even if we factor significant demand rebounds, ending stocks would increase to more than 1.2 billion bushels. If a 153.5-bu. yield were achieved, ending stocks under the same assumptions would balloon out to 1.9 billion bushels. That translates to falling feed prices.

So, as you can see, there is a good case for 2013 corn to be in the $4 range or the $9-$10 range. That’s a wide swing for a dairy operation to manage. With prices on the lower end of that range right now, it’s wise to lock in a feed price to protect against short-term price increases due to planting scares. If we do not have a good crop, you will be glad to have coverage.

If we do have a good crop, there should be opportunity to bring down your average price for feed. Locking in feed prices does not have to be (and should not be) a one-time thing. With the help of an experienced advisor, you can actively manage your price and use strategies to incrementally bring down your average price for the year.

In fact, there is real risk if you do not actively manage the value of your feed inventory. Again, looking back to 2009’s delayed planting, it ended up that we had higher than trend-line yields, and falling grain prices helped drive down milk prices. Many producers had high-priced feed in inventory as milk prices fell, with no price protections in place.

Be aware of the connection between feed prices and milk prices. If we do have strong yields and ending stocks increase, we will see falling grain prices and, as a result, lower milk prices. Consider using the current milk market, which has been largely supported by short-term feed scares and international dairy prices, to lock in a favorable milk price and protect yourself from a potential milk price crash.

So, while we cannot predict what grain prices will do, we can encourage you to be aware of the possibilities, and plan ahead. Uncertain markets require a recognition of what is possible and then active management of both your feed and your milk prices.

Patrick Patton is Director of Client Services for Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Patrick at 800-334-9779, or email him at ppatton@stewart-peterson.com.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, promoting the use of marketing tools, including futures and options. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Copyright 2013 Stewart-Peterson Inc. All rights reserved.

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