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Marketing: Prepare to be flexible

 

By Matt Mattke

 

Trying to predict the weather and corn/soybean market highs and lows? The better system is to put a strategy in place that accommodates all market scenarios. 

 

Attempting to forecast how high or how low feed prices will go in 2012 and where prices will be at year’s end is a poor use of one’s time. Unless you’re able to predict what the weather will be come spring, summer and fall with extreme accuracy, there is no way of knowing where prices will go, and where they’ll end up when all the 2012 crop year dust settles. The only thing you  can really count on for 2012 is volatility.

 

Expect volatility to continue to rear its ugly head in the 2012 feed markets because nothing will be different from any other year. The Funds haven’t gone anywhere; they’re still a major presence, moving tens of thousands of contracts in and out of corn, soybean and soybean meal markets.

Weather is still a driving force, constantly coming into play throughout the growing season. 

Changes in weather forecasts, actual weather and subsequent changes in crop conditions and USDA supply/demand forecasts will fuel rollercoaster-type price movements. Frost, drought and floods may come into play, wreaking havoc with feed price direction. Tight ending stocks mean good weather and good crops will be needed. 

 

Tracking historical trends

One simple way to display how constant volatility is – year-in and year-out – is by looking at price rallies and declines on a percentage basis. The tables above display the average, maximum and minimum percentage rallies December corn and soybean meal prices have seen from their respective closing prices on the first trading day in January. 

Corn: Since 2006, the average percentage rally in December corn, from the first trading day in January to its contract high, is 35.9%. The average percentage decline in the December corn price from the first trading day in January to its contract low has been -19.5%. 

 

The closing price for the December 2012 corn future contract was $5.90/bushel on the first trading day of January. Using the average percentage rally of 35.9% to the contract high would suggest a risk of corn rallying to $8.02/bushel before 2012 is over. The maximum percentage rally seen of 66.5% would say a price of $9.82/bushel is not impossible. 

 

On the downside, the average price decline of -19.5% to the contract low would say that $4.75/bushel December corn is possible, and the maximum percentage decline of -39.6% to the contract low would suggest $3.56/bushel December corn is possible. 

 

Soymeal: The closing price for the December 2012 soybean meal future contract was $318/ton on the first trading day of January. Using the average percentage rally of 26.3% to the contract high would suggest a risk of soybean meal rallying to $402/ton before 2012 is over. The maximum percentage rally seen of 55.0% would say a price of $495/ton is possible.

On the downside, the average price decline of -16.9% would make $264/ton meal possible. The maximum percentage decline of -25.1% would suggest a drop in the December meal price to $238/ton is a possibility.

 

Bottom line

Using just the average percentage rallies and declines of the last six crop years would suggest $8.00/bushel corn and $3.50/bushel corn cannot be ruled out; and $400/ton soybean meal and $260/ton soybean meal prices cannot be ruled out. For a dairy producer buying all of corn and protein needs, the difference in the size of their feed bill from $8.00/bushel corn and $400/ton meal to $3.50/bushel corn and $260/ton meal is huge.

 

Failing to protect against the higher feed price levels is taking on a lot of risk, while not being in a position to be able to partake in the lower feed price levels is also taking on a lot of risk. Be prepared for extreme feed price volatility in 2012, and get a strategy in place that accommodates all market scenarios. Put and call options are invaluable tools to provide protection and flexibility.

What will feed prices do in 2012? Who knows? The better question to ask is, “How well prepared am I for the volatility that is sure to come?” 

 

FYI

Matt Mattke, Market360SM dairy advisor at Stewart-Peterson, Inc., can be reached via e-mail: mmattke@stewart-peterson.com, phone: 800-334-9779 or visit www.stewart-peterson.com.

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