With corn prices considerably lower than those of last summer, it’s wise to explore input-purchasing strategies to boost your margins. Taking advantage of any break in corn costs is not a luxury, it’s a necessity for 2009.
With feed representing two-thirds of your production costs, and corn comprising about 50 percent of that, it weighs heavily on profitability. Timing your purchases is a challenge and any clues that help in that effort can be valuable.
“As input prices fluctuate, producers are undoubtedly asking ‘when do I buy feed and how much do I buy?’,” says Mark Schultz, chief market analyst, Northstar Commodity Investments in Minneapolis, Minn.
Schultz believes commodity price volatility will be with us for the foreseeable future. “Long term, we could see another wild move higher in these commodity prices,” he warns.
Short term, the downtrend in corn prices could soon be over. If you haven’t purchased some corn already, you may want to start, in order to pull down your average corn price.
To evaluate the markets and time your corn purchases, Schultz relies on several financial indicators to help him determine his strategy for the livestock and grain complexes.
First is the Dow Jones Industrial Average. “As long as the Dow Jones stays above 8,000, we’ll be fine,” Schultz says. He’s optimistic that stimulus packages introduced to support economies around the world will help maintain demand for pork and other exports.
The value of the U.S. dollar is another indicator to watch. Over the past eight years or so, the dollar has headed lower. However, in late 2008 there was a steep rally upward. “As the U.S. dollar goes up, our goods become more and more expensive,” Schultz says.
A strong dollar spells trouble for pork exports. “There is nothing worse than the dollar moving higher when we’re in a global recession,” he notes. It means slower exports.
“If the dollar’s index goes above 89 percent, there’s no rush to buy inputs because they will likely become cheaper,” Schultz points out. “If it goes below 84 percent, the dollar may be headed back down, which would prop up commodity prices in general and signal that it may be time to add to your feed purchases.”
Of course, there’s also historical market movements to watch; however, with the markets in uncharted territory, that’s not always an option these days.
Looking at what happened to corn prices in the 1970s adds an interesting perspective for today. Back then, corn spiked higher by 3.6 times its value. It then retreated for the next five months before again spiking to set a new high. Following that, prices dropped all the way back down to the level seen in 1977. (See accompanying chart.)
What occurred in 2007 and 2008 is similar. Corn increased by 3.7 times its value in about the same amount of time as in the 1970s. If history repeats itself, corn could again get more explosive to the upside; however, Schultz sees upside resistance for corn around $4.30 per bushel.
During the 1970s, purchasing corn after a five-month price decline was a timely buy. If corn prices rebound this year as they did back then, today could present a buying opportunity.
Pork producers also need to watch how much corn is used in mandated ethanol production. Corn demand will increase long term because of increased ethanol mandates. “If energy costs start rising at the same time that ethanol increases, you will have to become more aggressive in purchasing corn,” Schultz says.
For this year, corn used for ethanol production will be lower than USDA estimates, Schultz believes. In 2009, he predicts that 3.75 billion bushels of corn will go into ethanol production. His projection for 2010 is 4.3 billion bushels. “We think the only way corn prices will rally short term is because of weather problems, not demand,” Schultz predicts.
To protect against the risk of higher corn prices, consider buying futures or calls. But do seek out the help of an experienced broker who understands your risk tolerance.
That doesn’t mean you can get too comfortable with today’s corn price levels. Keep an eye on economic indicators as well as historic price patterns. If there’s another wild move in commodity prices, these indicators could give you valuable assistance in timing your corn purchases.
World Supply, Demand Drive Price
USDA’s World Agricultural Supply and Demand Estimates Report provides comprehensive supply and demand forecasts for major U.S. and global crops. The most recent report, issued last month, seems to point to a bearish outlook for corn prices in 2009.
Several factors cited in the report suggest that corn prices may not produce the same rapid rise as seen in 2007/2008. For example, U.S. corn ending stocks for 2008/2009 are projected to be 316 million bushels higher than previously thought due to higher estimated production and lower expected use.
The report has a slightly more bullish tone on soybean meal prices. Soybean production for the 2008/2009 crop is estimated at 2.959 billion bushels with the season-average soybean price range projected at $8.50 to $9.50 per bushel. According to the report, this translates into an increase in projected 2009 soybean meal prices to around $250 to $310 per short ton.
The WASDE report projects 2008/2009 corn production to increase by 81 million bushels, coming in at 12.101 billion bushels with the yield per harvested acre at 153.9 bushels. USDA reduced feed and residual use by 50 million bushels, reflecting lower animal numbers and lower September-November disappearance as indicated by the Dec. 1 stocks.
Also keeping a lid on corn prices this year is the sustained negative ethanol production margins that the industry has faced since early December. The incentive for ethanol output has been drastically reduced. As a result, USDA’s report cut corn use for ethanol by 100 million bushels.
Don’t Overlook Buying Opportunities
“Pork producers should still lock in corn prices when a profitable margin for their production system becomes possible,” says Darrell Mark, University of Nebraska agricultural economist. He believes it will be possible to see an increase in new-crop futures prices. There are a couple of factors that led the economist to this conclusion.
“It’s likely that corn acres will drop in 2009 as a result of lower relative profitability (for growers) and that soybean acres could increase,” Mark notes.
Citing corn’s demand base, he sees the possibility of upward price pressure if the planted corn acreage for the season drops too much. “Livestock must be fed, and ethanol has to be produced up to the renewable fuels standards,” he adds.
The other factor is continuing corn demand for ethanol production. It’s a common assumption that ethanol production and demand have diminished because several plants are either in bankruptcy or facing it.
“That is a short-run situation,” Mark predicts. “In the longer run, those companies will either re-emerge from Chapter 11 reorganization, or the assets will be sold to someone else who could then operate the plant with a lower fixed cost.”
He believes pork producers can feel a bit more comfortable this year and not fear a huge 2008-like corn price run up. “However, there remains a realistic possibility of seeing corn prices rally somewhat, particularly for the new crop,” he adds.
Mark’s bottom line is that producers should lock in corn prices when they can find a profitable margin or at least lock in a ceiling price for corn purchases by purchasing call options.