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Market Advisor: Spring Pricing Opportunities May Open and Close Quickly

Staying current on market information does not mean that one has to stare at the computer screen and watch every price tick up or down.

By Frayne Olson, Crops Marketing Economist

NDSU Extension Service

The window of opportunity for pricing old and new crop grain may open and close quickly this spring. This is due to the high level of uncertainty surrounding the U.S. and world demand outlook and the changing forecasts for U.S. crop plantings.

The expectation is for continued price volatility within a general trading range. This means that farmers will need to stay alert for pricing opportunities. Let’s analyze the supply and demand components individually and then discuss how farmers can develop marketing strategies within this environment.

We are entering the production season for the major U.S. grain crops. The March 31 U.S. Department of Agriculture’s Prospective Plantings report provided the first survey-based estimate of the 2009 planting intentions. This report suggested relatively minor changes in planted acres for wheat, corn and soybeans. The survey estimated 85 million acres of corn, a 1 percent reduction from 2008; approximately 76 million acres of soybeans, about the same as 2008; and 58.6 million acres of wheat, a 7 percent reduction from 2008.

However, based upon my analysis, there is an approximately four million-acre difference between the 2008 actual plantings and the 2009 prospective plantings estimate. Some of these acres may become prevented planting acres due to the extreme wet conditions in the northern Plains. We may see above-average abandonment of winter wheat acres in the southern Plains due to a combination of drought and frost damage. However, that still leaves a significant number of acres that are undecided. The new crop futures contracts will attempt to bid for these acres and find a balance in expected crop production.

As always, weather will have a substantial impact on the actual planted acreage and final 2009 production levels. However, given the larger carryover stocks from the 2008 crop and the uncertain demand picture, a sustained price rally driven by production concerns is unlikely. This does not mean that a weather scare will not create price spikes or pricing opportunities. It means that higher prices start rationing demand and that the current domestic and international demand outlook is not strong enough to sustain a major price rally. In other words, as prices rise, concerns about weak demand override the production concerns, so prices retreat.

An example of this can be found in the current soybean market and the production concerns surrounding the South American soybean crop. Drought has reduced the Argentinean crop and damaged the Brazilian crop significantly. This has resulted in increased demand for U.S. soybeans, especially from China.

A review of the Chicago Board of Trade May soybean contract shows two price rallies since the low of $ 7.95 per bushel on Dec. 5, 2008. The first rally reached a peak of $ 9.75 on Jan. 12, 2009. However, this price level could not be sustained, so prices fell back to $ 8.44 on March 2. The combination of lower prices and confirmed damage to the South American crop stimulated a second price rally. At the time of this writing, the second rally seems to have reached a high of $10.50 per bushel on April 17.

If the window of opportunity opens and closes so quickly, what type of marketing strategy will work in this type of environment? One needs to go back to the basics. There are three steps to follow to increase the likelihood of success. Producers need to stay current on market information, make smaller incremental sales and know their cost of production.

Staying current on market information does not mean that one has to stare at the computer screen and watch every price tick up or down. It means that a producer needs to spend a few minutes every day staying current on market news and keeping in touch with local price levels. When price rallies occur, take advantage of the opportunity.

Making small incremental sales is difficult because it is always tempting to try to sell the majority of the crop at the highest price of the year. Unfortunately, the highest price of the year only occurs once, so the odds of picking that magical day are very low. A less glamorous but more reliable strategy is to make smaller incremental sales throughout the marketing year. Historically, four periods during the marketing year offer above-average pricing opportunities. The four are spring planting time, summer weather rallies, basis improvement after harvest and late-winter delivery premiums.

Knowing your cost of production becomes critical because the cost of production varies considerably from farm to farm. In today’s economic environment, prices that are 10 percent to 15 percent above your cost of production should be viewed as pricing opportunities. This target range can be adjusted up or down to meet your preferred rate of return and specific farm business goals. Marketing in volatile times can be a very frustrating activity. However, patience and consistency can pay big dividends.

For more information, visit my Web site at http://www.ndsu.edu/cropeconomics.


NDSU Agriculture Communication

Source:Frayne Olson, (701) 231-7377, frayne.olson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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