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Ag economist says: Farmers need plan for price spikes

Farmers should keep in mind the short carryover stocks, an agricultural economist told corn and soybean producers at the annual Irrigation Conference at the University of Missouri. “Short supplies make the market nervous.”

Grain producers should look for volatile prices in the season ahead, said Abner Womack, co-director of MU Food and Agricultural Policy Research Institute (FAPRI). “We're already in a weather market.”

Womack urged producers to develop marketing plans in times of uncertainty to take advantage of spikes in prices. “Sit down with your banker and market advisors to develop a strategy.”

The FAPRI outlook projects 2003 season average prices for corn at $2.25 and soybeans at $5.15. “That outlook assumes we'll have a good weather and harvest a normal crop,” Womack said.

“If we get two or three weeks of dry weather at planting time, you'll see corn prices shoot up. Just as soon as we get a rain, that price strength will go away,” Womack added.

Futures options provide one way to capture spikes above the projected season-average price.

“Look carefully at buying options,” Womack said. “For a nickel a bushel, you could have locked in December futures for corn at $3 per bushel on Jan. 31.” At that price, an option contract on 5,000 bushels would cost $250 plus a $50 processing fee.

“In the event of drought, corn price would very likely exceed the $3 level,” Womack said. “In that case, the farmer could sell, keeping the price difference above $3.

“If prices do not strengthen, all that you've lost is 5 cents per bushel plus commission; but you've had price protection. Options are another risk-management tool.”

Womack urged the crop producers to go to their local USDA Farm Service Agency office to sign up for the new farm program. “If you have not signed up, go now.”

Counter-cyclical payments (CCP) in the new farm bill provide price supplements. He cautioned that those payments are tied to market prices and are designed to decline as prices increase.

“This creates difficulty for a farmer who makes a poor crop in times of high prices,” Womack added.

The low-yield, high-price scenario hit many farmers who had a poor harvest in fall 2002. “They sold fewer bushels at market price, but received no counter-cyclical payment.”

Farmers should develop market strategies that assure they get something equivalent of the CCP whether prices are high or low. The futures market offers one way.

“Buy crop insurance to the full extent that you can,” Womack said. “Use all available risk management tools.”

In other remarks, Womack said a weakening world economy has combined with a strong U.S. dollar to erode U.S. crop exports.

On the bright side, increased demand from ethanol, corn sweeteners, and food uses continues to grow. “To some extent, increased domestic consumption helps offsets weakening exports.” Womack said.

Increasing soybean acreage and prospect of a good crop in Brazil is the spoiler for higher bean prices, Womack said. In response to the question “Is Brazil the reason we are not seeing $7 for soybeans?” Womack had a short answer: “Yes.”

Duane Dailey is an Extension and ag information senior writer for the University of Missouri.

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