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Corn and Soybean Prices and Outlook . Ag Prices Conference August 27, 2008 Wisconsin Dells Rami Reddy UW-Platteville. Uncertainties and Opportunities. Increased volatility in commodity markets. Lots of uncertainty. (P=TSCI) (Price=Trend*Seasonal*Cycle*Irregular)

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corn and soybean prices and outlook

Corn and Soybean Prices and Outlook

Ag Prices Conference

August 27, 2008

Wisconsin Dells

Rami Reddy

UW-Platteville

uncertainties and opportunities
Uncertainties and Opportunities
  • Increased volatility in commodity markets.
  • Lots of uncertainty. (P=TSCI) (Price=Trend*Seasonal*Cycle*Irregular)
    • The volatility and uncertainty are going to stay with us.
  • Geo-political issues.
  • Once cent decrease in average price of gasoline is big news for us. How about 50% increase in food prices – food riots.
is there a structural break
Is there a structural break?
  • Record high crops – record high prices.
    • Good crop-poor reward; Poor crop – good reward. (Is this violated?).
  • Global consumption exceeded global production in eight of the past nine years.
  • Low grain inventories-rising prices to ration usage.
  • It is developing over a long time ( over a decade ) with a kicking factor of bio-fuels demand.
  • Is bio-fuels is the single most factor to blame? Why not economic growth?
  • Price levels have reached higher plateau.
why price increase supply and demand or c ombination of factors
Why price increase!(Supply and Demand&/or Combination of factors)
  • Supply side factors:
    • Production problems.
    • Tight global supplies.
    • Low carry over stocks.
    • All time very low stocks to use ratio in US as well as in the World.
    • Adverse climatic conditions; Weather and diseases.
    • Increasing cost structure.
    • Less public investment in agricultural research.
  • Demand side factors:
    • Strong economic growth & consumption increase esp. India & China.
    • Bio-fuels growth.
    • Favorable exchange rates: weak dollar ($ depreciation is 54% since 2002) (US economic growth)
    • Capital investment flows into commodity markets: Index funds.
    • Market distortions due to government policies.
    • Excessive Speculation???
global factors
Global factors***
  • Strong correlation between energy and corn, soybean prices.
  • Carry-over stocks declined in tandem with global economic growth and demand has increased for commodities.
  • Farm sector is linked directly to the energy sector via bio-fuels production.
  • ***Stop or reduce bio-fuels production is like asking a starving person to stop eating or a person with minimum means to reduce eating/not to upgrade diet.
outlook for 2008 09
Outlook for 2008-09
  • US Corn & Soybean markets.
  • Wisconsin share compared to other states.
  • Wisconsin crop progress.
price outlook of corn
Price outlook of corn
  • USDA projection for the nation-2008:
    • Production down 6 percent. (12.3 billion bu.).
    • Average yield 155 bu./acre; up 3.9 bu. from last year.
    • Lower expected season-average farm price is forecast at $4.90 to $5.90 per bushel, down 60 cents on both ends of the range from that of previous report.
    • WI projections:
    • Production down (less area harvested)
    • Average yield 141 bu./ acre; up 6 bu. from last year.
price outlook for soybeans
Price outlook for soybeans
  • Risk: early frost.
  • Mild summer weather – reduced risk premium
  • Improved Argentina situation.
  • High farm input prices – Brazil.
  • Appreciation of US dollar.
  • USDA projection for the nation-2008:
    • Production up 15 percent. (2.97 billion bu.).
    • Average yield 40.5 bu./acre; down 0.7 bu. from last year.
average price forecast 2008
Average price forecast-2008:
  • The U.S. season-average soybean price for 2008/09 is projected at $11.50 to $13.00, down 50 cents on both ends of the range.
  • Soybean meal prices are projected at $330 to $390 per short ton, down $25 on both ends of the range.
  • Soybean oil prices are projected at 54 to 58 cents per pound, down 5 cents on both ends of the range.
    • WI projections:
    • Production up (more area harvested); 32% more than last year.
    • Average yield 42 bu./ acre; up 3 bu. from last year.
recommendations
Recommendations
  • Be cost conscious. (control fuel and fertilizer costs by purchasing in advance).
  • High prices do not lead to higher profits.
  • The income differential between a producer that has good control over costs and with good marketing skills is high compared to someone that does not pay much attention to cost picture.
  • Farmers will be subjected to price-cost squeeze.
  • Continuing education and extension programming.
  • Long-term planning.
  • These are the years that separate good managers from less-than-good managers.
  • Need good information and good decision making skills.
escalating costs up 9 3 in 2007
Escalating costsUp 9.3% in 2007
  • Fertilizer costs up: High nitrogen costs (> 26 %).
  • Feed (22%) & Fuel (14%) costs.
  • Agricultural chemicals (11%).
  • Demand for storage space and machinery (11%).
  • Trend for all expense items are higher than 2006.
  • Mid-west region is the highest with 29% increase.
  • 2008 is no different except with more percentage increases for feed and fuel.
  • Costs are inflexible downwards.
  • Higher cash rents and increased farmland value.
  • Look for cheaper alternatives and substitutes.
projection for 2008 09 grains
Projection for 2008-09 grains
  • Declining profit margins: Expected softening in prices and inflexible (higher)costs.
  • Corn needs to be $4.50 and soybean needs to be $11.00 and above to realize profitable returns.
  • Retreat from current high prices happen as Dollar strengthen and crude oil prices decline.
  • Pork and beef prices are projected to increase in the next year.
looking forward
Looking forward

Control fear and greed.

Be objective.

Have the plan and follow it.

  • Global economy is slowing down.
  • Inflationary pressure.
  • Interest rates increase.
  • Dollar Appreciation.
  • Exports (grain) will decline.
  • Higher volatility.
  • Geo-political issues.
  • 2008-09 is the pivotal year and will see prices somewhat lower than 2007-08.