Feed price volatility: Will feed bleed the bottom line in 2013?
By Scott Stewart
All the components for more dairy feed-price volatility are in place for 2013. We could see $12 corn or $4 corn. That’s such a huge range that it’s worth examining how it’s possible, and what producers can do to protect themselves from a bottom-line bleed due to high feed costs.
We’re on a volatile supply-demand ride that began forming in the 1990s when previously isolated countries began taking part in the global economy. Increased populations and improved standards of living placed more demand on once abundant commodity supplies. Generally, the world had been able to keep pace, but that has changed. Now, supply problems in one area ripple across the globe, compounding price volatility.
Prices in 2013 will be influenced by a smaller 2012 crop, tight supplies and the need for ideal growing conditions. Big yields will be needed to replenish historically small supplies, both domestically and worldwide.
This year, it appears we will see the smallest corn crop since 2006 and the lowest-yielding crop since 1995. Carryout (ending stocks) will be a snug 700 million bushels, which means large demand could create significant upside price pressure. A tight stocks-to-usage ratio translates directly into volatility.
If you’re waiting for prices to settle down, don’t hold your breath. Price volatility is here to stay. Not only do we have tightening supplies and growing demand, we also have a high degree of geopolitical uncertainty. Inflation is expected to rise, which intensifies global interest in commodity assets.
From a day-to-day and week-to-week trading perspective, the prevailing sentiment can change at any time: Fluctuation of the U.S. dollar, drought and flood, fear of drought or flood, proclamations from China, livestock numbers and other market activity all impact trading. Emotion fuels extreme trading behaviors, and with uncertainty comes the likelihood of higher highs and lower lows.
I said earlier that corn prices could trade in the $4 to $12 range. What in the world could bring us $4 corn? If next year’s production rebounds, carryout could rise from roughly 700 million bushels to at least 1.7 billion bushels. From a historical perspective, it’s highly likely if the market believes carryout could increase to between 1.5 billion and 2 billion bushels, corn futures could drop back to under $4.50 in 2013. Given the current supply situation, this may not seem likely. Yet, history tells us when carryover doubles, a big price decline is almost a certainty.
There are other factors that could cause the corn price to decline, such as a big South American crop, a global recession, a U.S. dollar rally, or an Environmental Protection Agency waiver of the ethanol mandate (although this is likely to cause only a short-term correction before the market finds balance again).
I just laid out a case for extreme price volatility. The greater these swings in price, the higher the stakes for each marketing decision.
Many dairy producers respond by gathering as much information as they can about where prices might go. Too much information can be a trap, leading to a bias about where prices might go.
For example, we have just come off a drought, and soil moisture is very low, setting an uncertain stage for next year’s crop. That means feed prices must go up, right? Securing feed now might be a good decision.
However, I caution you against going all-in on this approach, because you just made a decision based on your opinion of where prices will go. Typically, when everyone thinks a market has to go one way, it goes another. Be prepared for bullish and bearish scenarios.
There are massive consequences for not being prepared. By developing sound strategies and consistently managing prices for both feed and milk, you can protect what you work so hard to earn.
Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results.
Weekly continuous soybean (top) and corn (bottom) charts show the growing severity of price swings. Scott Stewart wrote the ‘$12 Corn Report’ in late 2006, urging agricultural producers to prepare for volatility, and his message is still the same today.