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Tuesday, January 24, 2012

What IS Your Corn Marketing Plan?


How about those corn prices?  Oh, you’re not very excited about corn prices, you say?  March corn has bounced between $5.75 and $6.75 and new crop corn has had an 85¢ swing.  With such excitement, what is there to complain about?  Oh, predictable stability at high prices, is what you want?  Well, we all need to work on that.  But in the meantime, we have to work on a marketing plan with the cards that have been dealt to us.

Before putting numbers on paper, let’s see what is driving corn prices.  University of Illinois marketing specialist Darrel Good suggests there are many drivers for corn prices.  While some are in a forward gear, others are in reverse, they are all going at different speeds, and some of them could turn on a dime.  It takes a firm hand on the steering wheel and some strong vision to get to the destination.  But you have to beware of the hills, curves, and chuckholes.

What are those factors driving old crop prices:
1) Old crop prices are being supported by a good rate of consumption, and some uncertainty about how much corn South American will contribute to the world demand.
2) Basis levels have been strong, and unusually strong in some areas where local consumption is at a high level.
3) Corn stocks are at a five year low, and when the marketing year is finished next August, the carryover is expected to be at 6.7% of the use.
4) Ethanol has lost its tax credit, but not its octane, and the blending economics indicate there is still strong demand.
5) Corn export projections were recently raised by USDA, because of lower potential exports from Argentina.  And if weather continues to deteriorate, the crop could decline further and exports projections will have to be further adjusted.
6) Demand from China has been steady, with weekly purchases.
7) Domestic feed use has been at a low level because of reduced livestock production.

What are factors driving new crop prices:
1) Since March 2013 futures are lower than March 2012 futures, the market is anticipating a large new crop, resulting from better weather and increased acreage.
2) Inventory is expected to build with a return to trend line yields.
3) Planted acreage may increase 2 million over 2011 to 94 million, with the help of expiring CRP contracts.
4) Harvested acreage could jump 3 million to 87 million.
5) A trend line yield of 160 bushels would produce a crop just under 14 billion bushels, and

Good says demand would have to increase by 10% to avoid any further build up of stocks.
That is your road map, but as you travel that road, there will be some detours along the way, and there will be some areas of open road and better speed.  So what is your strategy to get to the destination?  Michigan State University marketing specialist Jim Hilker first suggests a look at your balance sheet and cash flow projections to find out how much risk you can bear.  Every farmer will be different, so look at your own situation to determine how much downside risk is reasonable, and not reasonable.  Hilker offers his forecasts of probability of corn prices.  For December 2012 corn, there is a 30% chance they will be less than $4.70, there is a 50% chance corn prices will be less than $5.38, and a 70% chance they will be less than $6.18.  Another view is that there is an 80% chance is that December futures will fall between $3.85 and $7.54.  Watch where the current price is in that range to determine the chance for higher or lower prices.

Hilker says there may be both upside and downside potential of risk, but you have pricing targets that you can set, knowing the chances of prices reaching certain levels.  With the $5.38 midpoint of the probability range, set your price targets high enough to reach profitable pricing levels, but also set your sell stops above levels where downside risk is too great.  Hilker says there is a good deal of market support below the $5.80 level, and strong resistance in the $6.60 range.

Old crop corn prices have fluctuated within a $1 range and new crop prices have floated in an 85¢ range, all driving by a variety of factors including South American weather, livestock feeding, ethanol production and other factors.  Marketing will depend on the amount of risk that can be taken by the producer.  Determine your risk that can be assumed, and set price targets within the probability range of corn prices.

Posted by Stu Ellis on 01/24 at 07:40 AM | Permalink

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