By Steve Kell
One of the most difficult things to do when developing a marketing plan for your crop is establishing what realistic targets might be for price.
In order to optimize returns for our farm businesses, it’s imperative that we don’t set price goals which are too low. But wishing for values that are unachievable also leads to disaster. The most critical step in marketing crops is to determine what the market is likely to do, and historical data provides an effective tool for accomplishing that.
In the winter time period, (between December and April), there’s nothing happening in a corn field that has the capacity to surprise the marketplace and force prices to react. The 2015 harvest is complete, the crop supply is established, and there are limited weather events which can impact the coming year’s growing conditions. So the grain market settles into a fairly predictable and rational numbers game until spring. This provides farmers with a period to size up supply, demand and price, and to develop a plan to finish the marketing of last year’s crop and to get started contracting the coming year’s production.
The basic purpose of price is to ration demand. If a commodity is scarce, it needs to be expensive enough that not everyone wants it, and if a commodity is plentiful, it needs to become cheaper in order to encourage its consumption. Commonly, we use stocks-to-use ratios as an indictor of price, and expressing those stocks as days of use is another way to view relative scarcity and how it correlates to price.
The Nov. 10 United States Department of Agriculture report estimated that the U.S. will have 54 days of corn supply left over from the 2015 crop when we reach the 2016 harvest. It’s essentially identical to last year’s 53 days of 2014 crop corn supply left over when we started the 2015 harvest. Logic would suggest that if the corn supply is similar to last year, then corn prices will be similar as well. The average price of the 2014 corn crop in the U.S. was US $3.85/bu, which converts to roughly $200 Cdn per metric tonne (factor in back freight and handling off in accordance with the location of your farm), and that’s likely where corn values will play out for the 2015 crop.
You might think that’s too simplistic: we have last year’s supply, we’ll have last year’s prices but take a look at the bigger field of evidence. In the 2009 crop year, (ending with harvest 2010), the U.S. had a 56 day ending supply of corn and the average price was US $3.87/bu. Three days more supply and 2 cents per bushel more expensive. The correlation between relative supply and price is extremely tight.
Producers who are looking back to 2012 and 2013 as they set target prices for the corn, are setting themselves up for disappointment. Between 2011 and 2013 we had corn ending stocks of less than 40 days (to an all-time record low of 29 days in 2012) and the prices were appropriately high to limit demand. At this point in the crop year, the market has no reason to believe that we can tighten back down to those supply levels, so there’s no rational reason to set pricing targets that high.
It would be incorrect to suggest that nothing could happen between now and next harvest to shake up the North American corn market. Between weather and politics, there are a myriad of reasons why we could see values adjust sharply. But those factors at this point are a guess and not a strategy. A producer who holds 10 % to 25 % of his grain back in hopes of high prices next summer is an optimist, But the guy who holds it all is delusional. It’s fair to say that if there’s a major drought or flood next summer, the market could find a reason to rally. But a solid marketing plan has a measured response to a potential event.
For the Ontario cash grain market, the expected large supply of soft wheat next summer could weigh on feed grain values. Every year, the cash price of soft red wheat and corn equalize in the feed market when wheat stocks surge to the point that it flows into the feed market to find demand. Even with 2015’s extremely small crop of wheat in the Great Lakes basin, by mid-September soft red wheat and corn were the same price in the Ontario feed market.
With a well-developed model of how we might expect the market to behave, it’s a reasonable practice to set targets at the top end of the expected price range, and then execute on those targets as they are achieved.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.