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Corn+Soybean Digest

Expect Volatility


A smiling young farmer recently said, “I made enough on my short corn to pay my dryer gas bill. I started a little early at $2.90 December corn futures, sold more at $3.20 and hit right near the high at $3.38, when my new-crop bid dropped down to loan. I banked all the profit.”

This was one of the better stories of someone who made scale-up hedges when good profits were available. He had the good business sense to lift those hedges when the USDA loan program offered a floor that protected against additional downside risk.

Look at the December 2004 corn chart and the November 2004 soybean chart and you'll see that this was a year with huge price swings.

From the contract high on December corn at $3.41 to the contract low at $2.25, a year-to-date $1.16/bu. trading range was created. The high came in early at $7.99 for November soybean futures. However, prices collapsed in August with a low of $5.49, creating a year-to-date trading range of $2.50.

I don't think prices are likely to take out the highs posted in the spring and summer of 2004 for a few years. But price swings of $1/bu. on corn and $2/bu. on soybeans will be the norm for the next several years.

Here are three reasons why I think we'll see these large price swings.

  1. Global demand for food continues to grow. If we use the current feedgrain stocks as an example — even with a record 10.8-11 billion bushel corn crop this year — global ending stocks are likely to drop for the fifth straight year.

    The high-water mark came in 1999 with global grain stocks of 441 million metric tons (MMT); this dropped to 257 MMT last year and is now pegged to drop to 247 MMT in 2005. What will happen to global grain stocks if the U.S. has a corn production problem next year?

  2. Commodity Research Bureau (CRB) index keeps moving higher. The hard three-month down move in the grain markets only dropped the CRB index from 285 to 264. This appears to be a minor commodity setback in a global bull market.

  3. Freedom-to-Farm program policy finally works. The plan was initially hit by the Asian financial crisis and the super-strong U.S. dollar. Now, farmers are planting crops the market tells them to plant.

We see strong competition for grain among exporters, livestock feeders and grain processors. With these three important sectors all needing to buy your crop, price rationing and price volatility will continue.

Sell Right, Stay Disciplined

Selling right is 50% of the battle; the other is staying a low-cost disciplined producer.

Here are three suggestions for your farm business.

  1. Stay disciplined. If markets rally to a level that gives you the benefits of the farm program in the cash market ($2.70 new-crop corn and $5.80 new-crop soybeans), begin to make new-crop sales.

  2. Be a scale-up seller when profit levels get good and keep selling as they get better. No one has a crystal ball and knows how high prices can go. But as we found in 2004, price rationing does occur. When futures turn lower, profit opportunities can disappear quickly.

  3. Be a scale-down buyer. With higher fuel prices and higher repair and insurance bills, costs of growing crops will increase 3-5% in 2005. Higher prices do not guarantee higher profits unless you can aggressively control input costs.

As someone who went through the booming 1970s and the bust of the early 1980s, I know higher markets don't guarantee higher profits. But they do provide excellent opportunities — and it's certainly better than farming the farm programs.

Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail:

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