Dillon Feuz: Corn market volatility
The corn market has seemed like it has been quite volatile this year. Has it been more or less volatile than it has been over the last few years? Has this volatility just been a major headache for cattle feeders trying to estimate feed costs and trying to determine how much they could afford to pay for a feeder steer, or does it present an opportunity to perhaps get your feed purchased cheaper than your neighbor and thus gain a competitive advantage? In this article I will try and briefly answer these questions.
Let me define the time frame for my analysis and the justification. I am going to consider the December Corn Futures contract from March until December. The USDA Prospective Plantings report is released near the end of March. Presumably, the December Corn Futures contract is providing a market signal to farmers to either plant more or less corn. Mother Nature then plays a big role in determining how many acres are actually planted and in determining the yield of the crop. By December the majority of the crop is typically harvested and the ultimate size of the crop is known.
This year the December Corn Futures contract was trading around $6 per bushel in March. Futures prices trended higher reaching a peak on June 9 of $7.23 per bushel; futures prices then declined fairly rapidly hitting a low price of $5.75 on July 1. Futures price rose for the next two month and established a high of $7.79 per bushel on Aug. 29. September then saw a sharp sell-off of corn futures and by Oct. 3 a new low had been established at $5.72 per bushel. As I am writing this article on Oct. 5, December Corn is trading back over $6 per bushel, just about equal with where prices were projected back in March. Who knows where the price will actually be in December near the end of harvest.
The trading range for December Corn has been just over $2 per bushel since March. Most of that volatility has been higher prices, relative to the March price, this year. So, how does this year compare to the last few years? In 2010, December Corn was trading at $3.90 per bushel in March; declined to $3.43 by June 29; and then increased to $6.05 per bushel on Nov. 9. The contract traded around $5.70 in December. That was a trading range of over $2.50 per bushel in 2010.
December Corn futures were around $4 in March of 2009. They then traded higher, peaking at $4.73 on June 2. December Corn futures then traded lower hitting $3.02 on Sept. 8 and then the market traded around $3.90 in December. So, 2009 had a trading range of about $1.70 per bushel. Finally, in 2008, December Corn futures were at $5.70 in March and traded higher reaching a high of $7.99 on the June 27. December Corn futures then trended lower and traded around $3.30 per bushel in December. The trading range in 2008 was almost $4.70 per bushel.
The answer to my first question is no; December Corn Futures hasn’t been any more volatile this year than it has been in the previous few years. Volatility, as defined by the trading range from March to December, has been about equal this year with 2009 and 2010 and it has been much less than in 2008.
Obviously, this volatility in corn prices makes it difficult for cattle feeders, hog feeders, chicken feeders, and dairy producers (did I leave anyone out?) to project feeding costs. Estimating returns is also difficult as well as determining how many head to feed and how much to pay for feeder cattle, feeder pigs, chicks, etc. Is there a silver lining in this cloud of uncertainty? Has there been any predictable times when feeders could have purchased corn ahead of time (forward contracted or bought futures) and been better off? Certainly, in hindsight, we all can look at a chart and determine when the low price occurred and realize that would have been the best time to buy corn, but is there a pattern to when the low prices occur?
Assuming that the current December Corn contract does not trade below the $5.72 price established on Oct. 3 (this may turn out to be a bad assumption; only time will tell), then the low price the last four years has occurred on Oct. 3, June 29, Sept. 8 and in December for 2011 back to 2008, respectively. I cannot see any pattern there that I could suggest you look to as a time when you might lock in a lower corn price. The low price, relative to the price in March for each year was about $0.25, $0.50, $1 and $2.40 per bushel lower in 2011 to 2008, respectively. Other than the fact that the low has been closer to the March price in the more recent years, there is no real pattern here. For example, I could not tell you that there should be a pricing opportunity each year at $1 below the March price.
Corn prices have been volatile the last four years and each year seems to have been unique in how prices have moved through the growing season. With no real patterns, I would conclude that the volatility has been more of a headache to corn users than an opportunity. That is not to say that feeders should just give up and take the price of corn when they need it. Volatility still implies that there will be opportunities to buy corn cheaper at some times than others. What I can conclude is that each year is unique and that corn feeders will need to watch this market closely, perhaps closer than or at least as close as they watch their own output market to take advantage of what appears to be favorable pricing opportunities.
