Why you’ve had a marketing headache!

Maybe you’ve seen the commercial where the husband tells the wife he’s going to wash off the back porch. She smiles happily. Then he says, “No, I’m going to power wash it!” as he pulls down his goggles.

The overkill power washer blasts water all over the patio, knocking everything off his wife’s picnic table, clearly out of control. The announcer says, “It’s an Excedrin headache.” Choose whichever headache remedy you like, but the commercial makes a point. The grain market has been somewhat like the power washer hose gone crazy since 2007.

Key Points

Price swings for corn, soybeans, over course of year were mild through 2006.

Volatility increased once ethanol and other factors impacted yields.

Best plan is adopting strategies to reach market averages, not highs or lows.

Chris Hurt, Purdue University ag economist, has put together a simple chart that illustrates the changes in the grain market going back to the 2000 marketing year. He prepared the chart to illustrate how ethanol influenced grain prices in the past few years. However, he notes other factors, such as a dramatic increase in soybean exports to China, also played into the changes.

How chart works

The chart represents changes in price of a commodity, from high price to low price, during the marketing year. It’s based on data Hurt collected over a decade. He takes price observations once per week. The ranges are for cash bids at a central Indiana elevator in cents per bushel.

“For example, for the marketing year representing the 2010 crop, which was from Sept. 1, 2010, to Aug. 31, 2011, there was a range in cash bids, based on once-per-week observations, of $3.82 a bushel on corn and $4.45 per bushel on soybeans,” Hurt explains.

That means if you were selling 160 bushels from 1 acre of corn, you could have had a $611-per-acre difference in gross revenue, just based on the day you priced the crop, Hurt adds. That’s assuming that at the high end, you priced all the crop on the best day, and on the low end, you priced it all on the worst day. In reality, one seldom prices an entire crop on the best day or the worst day.

Volatility means risk

Notice that during the first few years of the decade, the price ranges from highest to lowest were relatively small compared to the past five years, with only a few exceptions. When there are wider price swings, there are more opportunities for profit. But with opportunity comes risk.

“The numbers point out the enormous risk faced by producers in years like the last couple,” Hurt says. “As educators, we work with them to try to avoid the extremes in swings. We suggest diversification in pricing to move closer to the market average [for the year].”

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Source: Chris Hurt, Purdue University ag economist

This article published in the February, 2012 edition of INDIANA PRAIRIE FARMER.

All rights reserved. Copyright Farm Progress Cos. 2012.