Volatility - Is it Your Friend or Enemy?!
Oct 22, 2010
Another nugget of information that I got out of the speech by Dr. Boehlje of Purdue University on Wednesday is that accordingto their studies at the school, the volatility associated with agriculture has gone up by 400% in the last few years.
This means that the price swings in ag commodities is now 4 times greater than it used to be. I can still remember when I used to trade ag commodities on the futures exchange (many years ago) that a price move in corn of 3 to 5 cents was a huge move. Now, 10 to 20 cents is almost the norm.
Dr. Boehlje also indicated that the volatility is not just in the sales price, but also the price that farmers pay for inputs such as fertilizer, seed and diesel. Just in the last two years, we have seen fertilizer prices zoom up to about $1,000 per ton, back down to about $300 per ton and probably now around $700 per ton.
How does all of this volatility affect our farmers. Dr. Boehlje indicates that great farmers view these times as a great opportunity to expand their operation and make it more efficient. It requires them to take maximum advantage of marketing skills, financial reporting, and banking relationships. It allows them to lock in great prices and also lock in their input costs. Even if input costs go up by 50% or more, the increase in prices allow them to lock in a contribution margin larger than they can get now. However, this requires them to know what their actual cost of operations are down to the bushel and acre level and they have a great relationship with their bankers.
The key question is where do you fall in this spectrum? Do you view this volatility as an opportunity or does is worry you. I hope you are in the former's viewpoint.