Market Strategy: Uncertainty Breeds Volatility

April 5, 2011 11:45 PM
JerryGulke small
Jerry Gulke farms in northern Illinois and North Dakota, and is president of Gulke Group Inc., a market advisory firm with  offices at the Chicago Board of Trade. Gulke Group recently published
"Technical Analysis: Fundamentally Easy." For information, e-mail or call (815) 520-4227.

I occasionally review past columns and chuckle when I see an entire page of comments on how I was trying to glean 15¢ to 25¢ more for the price of corn for the year using the old FOR (farmer-owned reserve), which paid 26¢ a year for storing surplus corn.

In that day and age, a 5¢ to 10¢ move in $2.50 to $3 corn was volatile. We wished for a freer marketplace back then, and now we have it. Corn price swings of 15¢ to 30¢ a day are not uncommon.

After the crop revenue average price was set in February, corn dropped more than $1.25 by March 15 due to the Japanese crisis and hedging insurance revenues (see chart). At press time, corn was locked limit up on oil crisis concerns and rumors of the Chinese buying U.S. corn for late summer delivery. In 10 trading days, corn moved $1.60 or about $300 per acre, giving volatility a new meaning.

Price Volatility Can Be Good and Bad. The positive side of volatility is that end users have a chance to lock in a buying price and producers have the opportunity to secure a selling price. On the flip side, I fear we are capitalizing profits right back into land, machinery and input costs rather than paying off loans and putting profits in the bank. The knee-jerk reaction to Japan’s disaster shows how quickly money can flow in and out of commodities.

As often happens in times like this, land gets turned over to professional farm managers and rent skyrockets. It happened on one of our farms. A systematic, reasonable increase can be expected and was the case during my 20 years of dealing with this particular landowner.

On March 4, though, I was shocked to receive a notice from the new professional managers that rent was going to increase by 200% on a 14-acre parcel. The rationale for such an outrageous rental price on a piece of land no bigger than a large garden was to provide an ROI on the $8,000 per acre sale price that looks good to the prospective buyer. The subsequent volatile drop of $1.25 per bushel during discussions didn’t change anything.

Obviously, with a lawyer in the family (my daughter Ashley), this case isn’t closed yet. Win, lose or draw, allowing a 14-acre patch to set the rental rate does nothing but cause distress for the area producers.

MarketStrat cornpriceDid Usage Slow When Prices Rose? The USDA stocks and acreage reports at the end of February created more questions than answers. A stocks level 150 million bushels higher than estimated meant usage deterioration occurred during a rally from $5.50 on Dec. 1 to $7.25 on March 1. Demand destruction has started, and additional price increases cannot be justified.

If stocks come in less than estimated on March 31, the question will be, If demand wasn’t reduced in the second quarter of the marketing year (December, January and February) at prices $2 higher than the first quarter (September, October and November), what price will it take to do so? The $1.25 drop in early March will have been pointless except to provide another opportunity for the end user to extend coverage, making demand destruction more difficult going forward.

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