Market Strategy: Volatility Equals Opportunity

September 28, 2016 01:28 AM
Market Strategy: Volatility Equals Opportunity

About a year ago, we heard forecasts of doom and gloom in our markets. Projections suggested marketing year 2015/16 would be one of low volatility and price ranges yielding only dimes and nickels in profit opportunities. The well-advertised global glut of grains would hang over our heads. 

Yet in the past 12 months, much to the surprise of many in the market, corn has had a range of about $1.40 per bushel and soybeans of $3.50 per bushel. 

By using this year’s estimated national average yield of 50.6 bu. per acre for soybeans, we can calculate that a typical acre of soybeans has experienced a swing of $175 per acre up and down for a total range of $350. Corn’s estimated national average yield is 174.4 bu. per acre, meaning the average corn acre has seen a total range of $243. Indeed, volatility equaled opportunity in the past year.

Debt Versus Equity. For a 3,000-acre producer with a rotation of 50% corn and 50% soybeans, gross income moved $525,000 for soybeans (1,500 acres x $350) and $422,00 for corn (1,500 acres x $243). That works out to a total swing in gross farm income of nearly $1 million in the past year. It puts volatility in a whole new perspective. 

Compare the astute marketer who captured even one-third of the profit opportunities to someone who missed opportunities and there could be a wide variance in net profit or loss. The outcome looks bleaker for a producer who does not have sufficient on-farm storage to capture a 40¢ to 50¢ corn market carry and basis gain. 

To put this in further perspective, compare an astute 500-acre farmer who is debt-free compared to a highly leveraged 10,000-acre producer who perhaps did little marketing in the past 12 months. 

Odds are the smaller farmer will pay income taxes while the highly leveraged producer might become friendly with his local auctioneer—and become the worst enemy of his local banker. 

These are not markets my father would have envisioned, nor are they markets familiar to anyone who entered farming 15 years ago. These producers haven’t previously dealt with low farm-gate prices and minimal short-term encouragement. 

About a decade or so ago, I wrote a column about the benefits of owning farmland with a 20-year plan. I thought by understanding the principles of supply and demand and associated price discovery, a producer could die a millionaire. Accountants and some land-grant university economists chastised me for embracing such an attitude. 

The naysayers referenced other investments they said made more sense in the long term, such as the stock market. I suspect their disgust stemmed in part from the fact they had neither enjoyed owning farmland nor experienced a free-will vocation. 

Big Yield Dilemma. That was then. This is now. La Niña appears to be back to a neutral standpoint, so there are increased odds both North America and South America could witness normal crops with trendline yields in 2017. Without a production-changing weather market by a top exporting country, excess supply will easily meet global demand. 

We missed an opportunity to solve the problem this year. Average temperatures neared levels that could have taken yields below trendline, but excess summer moisture seems to have prevailed. A dilemma lies ahead for corn, one that will affect the global crop mix of corn, soybeans and wheat in major growing areas.

USDA’s October supply-and-demand report should answer a lot of questions about whether high nighttime temperatures did their job in limiting yields. A nearly 75% good-to-excellent rating for both corn and soybeans as of mid-September suggests three-fourths of the crop is above trendline. Increasing grain stocks that keep prices depressed increases odds the stock market might outperform land in the next decade.  

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