Late last winter I achieved my 15 minutes of fame with a quote in the Minneapolis Star Tribune. In one of many articles about the impact of ethanol on corn and other grain prices, I said, “The answer is ethanol. I don't care what the question is, the answer is ethanol.”
Well, OK, I didn't say it was an intelligent quote.
I was trying to point out that the impact of ethanol goes beyond the price of corn. Increased ethanol production raises the demand for corn, which, in turn, raises the price of corn. Higher corn prices led to higher corn plantings (14 million more acres). More corn acres led to fewer soybean acres, fewer wheat acres, fewer barley acres, etc.
Fewer acres for other crops meant less supply and higher prices. Everyone knows that soybean and wheat prices are high, but the impact goes beyond these well-known crops. Did you know that durum wheat is trading at around $15/bu.? Durum wheat is milled into semolina, which is used to make pasta. Why is durum wheat trading at a price level more than three times its long-term average price? The answer is ethanol.
The ethanol boom has created a volatile market environment. Here are a few things to consider to adapt your marketing plans to the current market.
Break your selling decisions into many smaller decisions. Try not to treat marketing as one or two major pricing decisions. This approach can make you very right or very wrong. Break your plan into a number of small decisions.
Be willing to get creative with your pricing tools. Is the market trending higher and you reached a price objective? Consider following the trend higher, and sell when the trend turns lower. See my 2008 pre-harvest marketing plan below for corn and note “pricing tool tbd” (to be determined). High volatility demands a more flexible response. Get creative.
Be patient. Current pricing opportunities two to three years out are very good, but the March to May period is often better. Make sure you have some pricing decisions left to throw at the market. You don't want to get too far ahead yourself.
Tie your planting and pricing decisions together. Last winter, new-crop cash corn prices were close to $4/bu. American farmers responded to those favorable prices by planting 14 million more acres of corn. We harvested $3 corn — not a bad price, but still quite a bit less than the price that compelled us to plant more corn.
This happens more often than we like to admit; the price we plant for is not the price we harvest. I've spoken with southern Minnesota farmers who are seriously considering wheat — $6 wheat will generate interest in non-traditional areas. There is also strong interest in planting $9 soybeans. As good as these markets are today, I'm concerned for producers who are buying seed and fertilizer with the intention of planting $6 wheat and $9 soybeans. They run the risk of harvesting $4 wheat and$7 soybeans.
If higher wheat and soybean prices have you interested in producing more of these crops, then you better price some of your planned production now.
Despite falling ethanol margins, the boom is far from over. Many plants will come into production over the next two years. The battle for acres remains, and the resulting price volatility will make several crops look attractive. Again, don't forget to tie your planting and pricing decisions together.
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at firstname.lastname@example.org.