The drought of 2012 let corn prices explode to record prices last year. But, don’t expect the tail to wag the dog this year.
Steve Johnson, Iowa State University farm business management specialist, says farmers must be realistic about price expectations.
In February, Joe Glauber, USDA’s chief economist, predicted that average farm price for corn would fall between $4.40 and $5.20, down roughly 30% from the previous marketing year. He explained that downfall would occur due to normal yields in 2013 and increased acres.
Chasing the Wrong Tail
In working with Brugler Marketing, Johnson decided to plot the cash corn price distribution expectations on a bell-shaped curve. Due to planting and weather challenges, he narrowed the price expectations from $5 to $4.25. The probability to hit $4.40 corn is 64%, with the high and low ranges being much less likely.
"The last two years, many farmers focused on capturing the left tail (the highest cash prices)," Johnson says. "Too many probably chased that higher potential left tail in 2013 and now they’re getting the middle or that right tail. Farmers should adjust their price expectations and acknowledge the limited chance of higher prices, and plan for average cash prices that are back between 2009- and 2010-levels."
Corn Cash Price Range Forecast
Source: Johnson, ISU Extension, July 18, 2013
Manage Your Risk Now
No one wants to hear prices are headed down. But, Johnson says you can still make smart marketing decisions to reduce your risk.
If corn prices stay below $5, Ted Seifried, chief market strategist and vice president of Zaner Ag Hedge, predicts most farmers will put their grain in the bin.
"After a few years of mostly good profits for producers, there has been a good amount of reinvestment back into the operation in the form of storage," Seifried says. "On top of that, many guys have or are in the process of clearing out their bins as prices have been good."
Seifried doubts there’s much of last year’s crop is left in storage, which means the capacity is there to store a lot of the 2013 crop. "Producers will likely hold on tight to stocks waiting for higher prices, and if this is done on a large enough scale it could cause a shortage in the cash market and push basis up and support futures prices."
Johnson’s advises farmers to focus on harvest logistics. "Buy all your needed propane, make sure your grain handling systems are working properly and avoid long-term commercial storage," he says. "Also, talk to your lender and develop a long-term storage plan. Your marketing plan should now reflect storage costs."
While it might be hard to start thinking about 2014, with this year’s harvest just around the corner -- start. Seifried says next year is the year that scares him the most. "Crop insurance levels could be at lower levels, storage bins could be overflowing and beginning stocks might be the largest in years," he says. "What happens if we have a decent crop next year? Well, that’s when we might be talking about ultra-low prices."