Let's examine the annual price volatility in the corn market over the past decade. In this study, when we discuss volatility, we are measuring monthly average prices. We are using USDA monthly average corn prices received by U.S. farmers. We identify both the highest and lowest monthly average prices, followed by the average price for the entire marketing year. Next, we take the difference from the highest monthly price from the lowest monthly price for the year, which is then divided by the marketing year average price received from U.S. farmers for corn. This gives us an annual percent volatility in the corn market. In the chart 1, you can observe the annual volatility in the corn market going back to the 1976 marketing year. We had a marketing year record low volatility of 8% 2016/17, and a high of 63% in 1987/88. The average annual volatility over the period is 28%
Let's run this scenario on 500 acres of corn production in Northwest Iowa. We will assume 200 bushels-per-acre yield. That would give us 100,000 bushels of production, which would amount to $238,000 in revenue volatility during the 2010/11 marketing year. That crop year, we experienced a marketing year high price of $6.88 per bushel and a low of $4.08. This same operation would have experienced $27,000 of revenue volatility in 2016/17, of which we had a marketing year high of $3.49 per bushel and a low of $3.22.
In chart 2 and 3 below I've identified the last 10 years annual revenue and price volatility on 100,000 bushels of corn production. Recall, this value is from the price range for the year, derived from average monthly prices.
As a producer of a commodity product in which you have no pricing leverage, it is crucial to understand the importance of pricing opportunities and the impact they have on the revenue of your operation. The average high/low price range per bushel over the 10 years was $1.28 per bushel. This amounts to $128,000 of annual revenue opportunity for the average 500-acre corn operation. Do you have a risk management plan in place to manage capitalize on volatility.
Risk Management: (in business) the forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact.
I highly recommend reading the book "Managing Commodity Price Risk" by George A. Zsidisin and Janet L. Hartley. It is a short, easy read to follow
Check out The Heat Map Marketing Strategy and Get Started with a Risk-Free Trail.
© 2017 The Ag Fix, LLC. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
U.S. Corn Highlights - 2.340 billion bushel carryout, up slightly from September.
This month’s 2017/18 U.S. corn outlook is for larger production, increased feed and residual use, and nearly unchanged ending stocks. Corn production is forecast at 14.280 billion bushels, up 96 million from last month. Corn supplies are higher, as a larger crop more than offsets a reduction in beginning stocks based on the Grain Stocks report. Projected feed and residual use is increased 25 million bushels. With supply and use changes essentially offsetting, corn ending stocks are up 5 million bushels from last month. The projected range for the season-average corn price received by producers is unchanged at $2.80 to $3.60 per bushel.
2017/18 Corn Stocks to Use at 16.39%.
World Corn ending stocks down 1.5 at 200.96 MMT.
Foreign corn production is forecast higher, with the largest reductions for Russia, Ukraine, Ethiopia, and Tanzania more than offset by increases for a number of countries including Nigeria, Turkey, and Mozambique. The projected corn yields for Russia and Ukraine are reduced based on reported harvest results to date. Historical revisions are made to Nigeria’s corn, sorghum, and millet production estimates to better reflect statistics published by the government. Corn exports are raised for Mexico and Argentina, with largely offsetting reductions for Russia and Ukraine. Argentina’s 2016/17 exports are lowered for the local marketing year beginning March 2017 reflecting a slower-than-expected pace of exports to date. Projected 2017/18 food, seed and industrial use for corn in China is raised based on recent trade data indicating a higher-than-expected level of corn product exports. Foreign corn ending stocks for 2017/18 are down from last month, mostly reflecting declines for China and Mexico that are only partially offset by increases for Argentina and Turkey. Global corn stocks, at 201.0 million, are down 1.5 million from last month.
US Soybean Highlights - 17/18 ending stocks at 430 million, down 44 million from Septmeber.
Soybean production is forecast at 4,431 million bushels, nearly unchanged from last month with higher harvested area offsetting lower yields. Harvested area is projected at a record WASDE-570-3 89.5 million acres, up 0.8 million. The soybean yield is forecast at 49.5 bushels per acre, down 0.4 bushels. With lower beginning stocks, soybean supplies for 2017/18 are projected down 44 million bushels. With use projections unchanged, ending stocks are projected at 430 million bushels. If realized, ending stocks relative to use would be the highest since 2006/07.
The 2017/18 U.S. season-average soybean price is forecast at $8.35 to $10.05 per bushel, unchanged from last month. Soybean meal and soybean oil price projections are also unchanged at $290 to $330 per short ton and 32.5 to 36.5 cents per pound, respectively.
2017/18 Soybean Stocks to Use at 9.9%
World Soybean Highlights - World Stocks down slightly
Global soybean production is projected down 0.6 million tons to 347.9 million on lower forecasts for Russia and Ukraine.
Summary by Chris Benson
source: USDA WADSE
Full report here