We previously examined corn volatility on December 5th, 2016, in our blog "Understanding The Volatility In Your Business -Part 1." Now, we will look at soybean price volatility. For review, when we discuss volatility in this study, we are measuring monthly average prices. We are using the USDA monthly average soybean price 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 soybeans. This gives us an annual percent volatility in the market.
As with the corn study, we are observing the annual volatility in the soybean market going back to the 2006 marketing year. We have a marketing year low volatility of 7% in 2014/15, and a high of 47% in 2010/11. The average annual volatility over the period is 23%. Why is understanding this important?
We will run this scenario on 500 acres of soybean production in Northwest Iowa. We will assume 55 bushels-per-acre yield. That would give us 27,500 bushels of production. This would amount to $94,050 in revenue volatility during the 2010/11 marketing year. That crop year, we experienced a marketing year high price of $13.40 per bushel and a low of $9.98. This same operation would have experienced $36,300 of revenue volatility in 2014/15, of which we have a marketing year high of $10.90 per bushel and a low of $9.58.
As previously discussed, 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 annual high/low price range per bushel of soybeans over the last 10 years is $2.50 per bushel. This amounts to $68,640 of annual revenue opportunity for the average 500-acre soybean operation. Are you managing this volatility with a risk management plan?
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