The indicators came early in 2008 that confirm a volatile grain market awaits crop producers looking to price a crop and pork producers looking to minimize feed costs.

An integrated model to price corn and soybeans that considers a broader range of strategies than traditional approaches may help both sets of producers make decisions in these uncharted markets, according to a University of Illinois Extension study.

University of Illinois Extension specialists Darrel Good and Scott Irwin prepared the study, which is available at the Farmdoc Web site. It addresses what Good and Irwin term the “pricing matrix” approach.

“It’s similar to the strategy of diversifying one’s investments across different types of products,” Good says. “The emphasis here is on strategy, not on implementing specific pricing decision types such as pricing tools, timing and the like. Implementing pricing decisions within a cell of the pricing matrix will be impacted by a variety of factors, including crop insurance selections and government program payments.”

Whether it’s buying or selling crops, price risk has long been a top risk-management priority for farm businesses. Pork producers are getting a harsh reminder of that right now. A major challenge and source of frustration is the extreme variability in corn and soybean prices, not only across years but within years.

Good provides this example: During the 25 years between 1982/1983 and 2006/2007, the average marketing-year price of corn that Illinois producers received ranged from $1.54 per bushel in 1986/1987 to $3.30 in 1995/1996. The daily spot cash price of corn in central Illinois during that time ranged from $1.22 per bushel on Oct. 16, 1986, to $5.25 on July 11, 1996.

“For soybeans, the 12-month marketing-year average farm price ranged from $4.50 per bushel in 2001/2002 to $7.94 in 1983/1984. The daily spot cash price of soybeans in central Illinois ranged from $3.87 per bushel on July 8, 1999, to $10.40 on March 22, 2004.”

Another challenge and frustration is that futures prices cannot be anticipated with a high degree of accuracy. Traditionally, making corn and soybean pricing decisions has been based on a combination of analytical techniques known as “fundamental and technical analysis.”

“These are used to forecast future price behavior, and then to time pricing decisions based on those forecasts,” Good says. “That approach has essentially been one of attempting to ‘beat the market’.”

Good and Irwin identify four steps necessary to implement the pricing matrix approach:

  • The first step is to select the appropriate time window for pricing corn and soybean crops, or feedgrains.
  • Second, determine the relevant set of crop or feed pricing strategies.
  • Third, decide on the crop proportions to be marketed or purchased via each of the pricing strategies.
  • Fourth, evaluate performance after the marketing window is completed.

The complete report includes examples for producers to follow to gain insights on how to adopt the pricing matrix approach for their enterprises.

While Good and Irwin did not develop specific examples for purchasing feed through the matrix, the application is straightforward. “The decisions about when and how to purchase feed could be allocated to each of the cells in the pricing matrix,” Good says. “There would be some minor differences since some of the new generation contracts that are available for selling have not been developed for buying, but all of the other pricing alternatives are available as buying alternatives.”

The two researchers believe that many producers are substantially under-diversified in terms of pricing approaches, with an over-reliance on self-directed active strategies.

"Diversification across the four cells of the pricing matrix would likely improve marketing performance for many producers,” Good notes. And it would reduce the risk and frustration of making corn and soybean pricing or buying decisions, which is worth a lot.

To test out the “pricing matrix” approach, follow this link.


Plan Now for Fertilizer Needs

If you’re a crop producer, and most pork producers still put seed in the ground, be sure to put “secure fertilizer needs” on your early to-do list.

Nitrogen, phosphorus and potassium fertilizer supplies are all going to run tight nationwide. In fact, winter wheat growers have already faced challenges in buying nitrogen fertilizer, unless they had it secured ahead of time, notes Dale Leikam, Kansas State University Extension nutrient management specialist.

“The tight supply situation applies to all of the main nitrogen fertilizer sources — UAN solution, urea and ammonia — as well as other phosphorus and potassium fertilizers. Prices are continuing to increase and supplies will likely remain tight for the foreseeable future,” he says. “Therefore, producers should
keep in close contact with their supplier and line up their anticipated fertilizer needs. Waiting until it’s time to apply crop nutrients could leave you on the outside looking in.”

The sharp price increase and accompanying fertilizer nitrogen shortage is not a sudden development. Market forces have markedly changed the fertilizer industry during the past decade, which has set up the current supply/demand imbalance and the resulting high prices, Leikam points out.

“In the past decade, much of the U.S. fertilizer nitrogen manufacturing
capacity has shut down as a result of sharp increases and fluctuations in natural gas costs, lower-cost foreign competition, domestic environmental regulations and so forth. In most cases, the domestic fertilizer manufacturing plants that have ceased operations will never come back online despite the current higher prices,” he adds.

As a result, nitrogen fertilizer supply is increasingly imported from countries in the Middle East, South America, the former Soviet Union and other low-cost natural gas areas.

“More than 50 percent of the U.S. fertilizer nitrogen supply is imported annually. Also, the global demand for fertilizer nitrogen continues to increase, especially in countries with rapidly expanding economies like China and India,” Leikam says.

The counterbalance to that is to stay in contact with your fertilizer supplier and order your supply as soon as you identify your needs. It also makes hog manure a more valuable commodity.