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Wednesday, March 14, 2012

A Marketing Plan For A 2012 El Nino



 

At this point in the spring, probably all of your planting decisions have been made.  Seed has been delivered, fertilizer is being applied, and your planter is awaiting warm, moist soils.  You are going to plant the acreage you farmed last year, but your neighbors on the other end of the road, where some of the rougher ground periodically lies idle, are ordering their seed to push the acreage numbers a little higher in your county.  Your management and marketing plans may or may not be in place.  Marketing plans are probably pretty rough, but you know what you have to net to pay for variable and land costs.  Crop insurance is expensive, but may let you sleep at night.  The only unknown is the weather, so let’s address that.

La Nina has been a pain in the wallet for farmers in both North America last year and South America over the winter.  Drought-impacted yields have reduced revenue for nearly every Cornbelt household, but relief may be in sight.  Authorities are predicting the phase out of La Nina, and phase in of El Nino, which is more crop-friendly.  Iowa State University economist Steven Johnson provides a thorough look at 2012 growing season weather which provides the opportunity to more reasonably fill out your marketing plan and become more confident in having the bushels to sell, or at least know your Harvest Price Option on revenue-based crop insurance will give you the comfort of knowing you are covered in any shortfall.

As the sun escapes the Southern Hemisphere and cross the equator in a few days, the Pacific equatorial waters will warm, shifting from a La Nina weather pattern to an El Nino.  While the change is made, the weather patterns briefly will be in a neutral position, but they have massive amounts of inertia and “neutral weather” is just a passing fancy.  El Nino will likely be increasing in its intensity in the latter half of the spring.  The specialist at the National Oceanic and Atmospheric Administration, Dr. Klaus Wolter, says that all of the 10 La Nina events in the past two decades that were two seasons long either stayed for a third season, or shifted to an El Nino without any shifting to neutral.

So knowing that La Nina (a dry western Cornbelt and wet eastern Cornbelt) is fading and an El Nino is expected to rule the summer, what can be expected in the way of weather?  Iowa State meteorologist Elwynn Taylor says an El Nino will likely provide a much better average corn yield in 2012.  He says the odds that the national average corn yield will exceed the trend line yield are 60%, with only a 30% chance of below trend line yields for the third consecutive year, and only a 10% chance of “neutral” weather.

Using those percentages, Taylor and Iowa State colleague Bob Wisner estimated potential prices for corn, should the predictions come to fruition.  With a 60% chance of yields over 165 bu. there is a need for corn storage to be planned and not lost to quality issues in open storage.  But with such a high expected yield and 94+ mil. acres to be planted, Wisner says the average market price will be under $5, or at least a 60% chance of an El Nino-driven yield.  He says there is a 10% chance of a 164 bu. national yield at a $5.15 average corn price, and a 30% chance of a La Nina-driven average yield of 148 and a $6.60 national average price.  While the pricing comes from Wisner, the yield projections come from Taylor, and he only missed the 2011 national yield of 147 by two-tenths of a bushel when making his La Nina predictions last June.

Based on corn supply and demand, the Iowa State team says, “These forecasted futures prices at harvest in 2012 are based on the assumption that U.S. farmers plant 94.5 million acres of corn for grain in 2012. Approximately 87.7 million acres (92.8% of planted) are harvested for field corn.  The demand for U.S. corn ranges from 12.9 to 13.25 billion bushel as ending corn stocks drop to 716 million bushel by August 31st, 2012, the end of the 2011-12 marketing year.” 

Based on Wisner’s similar numbers for soybeans, they project a 60% chance of a 45.5 bu. national soybean crop and a national average price of $10.25 or less.  If La Nina stays, there is a 30% chance of a 41 bu. average crop and an average price of $11.75. They say, “These forecasted futures prices at harvest in 2012 are based on the assumption that U.S. farmers plant 77.5 million acres of soybeans in 2012.  Approximately 76.4 to 76.7 million acres would be harvested and these numbers are larger than many private analysts are currently forecasting.
The demand for U.S. soybean ranges from 3.65 to 3.85 billion bushel as ending soybean stocks drop to 271 million bushel by August 31st, 2012, the end of the 2011-12 marketing year.”
Johnson says with the forecast for higher yields and lower prices, fall prices will be lower than current prices offer for delivery contracts.  Dec corn is about $5.70 and Nov beans are above $13, compared to the $5.68 and $12.55 guaranteed by Revenue Protection crop insurance and the Wisner projection of under $5 for corn and $10.25 or less for beans.  Johnson says, “Capturing both new crop corn and soybean prices when December corn and November soybeans are at or above these levels is a reasonable strategy. Again, this combines forward cash contract and hedge-to-arrive strategies in combination with selling “insurance bushels” covered by Revenue Protection crop insurance.”

Summary:
La Nina appears to be shifting to El Nino, which would bring much higher yields and lower prices than in the past two years.  With current market prices and the crop insurance guarantees at substantially higher levels now than projected fall prices for an El Nino crop, many producers still have the opportunity to forward contract a portion of their crop and be able to depend on “insurance bushels” for any shortfall.

 

Posted by Stu Ellis on 03/14 at 12:02 AM | Permalink

Comments

The problem with models is they are not real life. Even if based upon historic value, the future tends to find its own way (Past Performance is not a Guarantee of Future Results). One way to try to improve a model is to change or select data that has a chance of more closely matching future expected events. Not sure if this helps things, for now we have no past performance - just a modified history, with still no Guarantee of Future Results. With this being said, Zoodoo, our forecasting model that has the goal of finding answers no matter how wrong, shows a very similar price distribution as described in the blog without special weather considerations. When focused on Northwestern Illinois, pre-harvest price protection seems to be warranted, as also noted in the blog. The variance is in the level of sales. The highest minimum net income occurs with pre-harvest sales in the 45%-55% of APH range (50%-65% of guaranteed yield) when an eighty five percent (85%) revenue protection policy is used. Higher levels of sales seem to hurt net income opportunities in the higher harvest price lower yield environment like the La Nina situation described in the post. The crop insurance policy does not provide enough “protection power” to cover the APH yield plus additional pre-harvest sold bushels. (That is where GRP (county yield insurance product) could really shine when high protection levels are used. I know, no one uses that coverage but it looks to be “The Berries” with “heavy” pre-harvest sales.) Once the risk of “super high” prices in a low farm yield environment is removed, more pre-harvest sale may be warranted. Yes, “the cat could be out of the bag” by that time and prices might be dropping to the floor. From our point of view the risk of over selling in La Nina justifies missing additional income potential of El Nino. The future farm yield-price relation is unknown. Our model’s projections are suspect at best. The lesson learned might be, just because one has protection from a crop insurance product, it may not be best to use all that protection on pre-harvest sales, at least early in the season. One needs evaluate their own situation. Jib aka Gibberish PS It is interesting to note, our model calls for no pre-harvest sales of soybeans (solved for highest minimum price) when the pricing structure in the model increases by a dollar, on average. This occurs even when the average and median prices are below the insurance price and pre-harvest sale price.

Posted by: Jib at March 15, 2012 1:01AM

This is a great topic to ponder on. El Niño will be a great verity with all these sudden climate change. Just new to your site and was referred by a friend. I found your site very interesting and would love to read more post.

Posted by: mrsunnywilliam at March 30, 2012 3:03PM

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