Grain market uncertainty pushes producers toward risk-management practices
Nov 7, 2008 9:00 AM
What happens to grain demand in times of economic slowdown? Does grain demand change or is it such a fundamental commodity it is immune from some of the impact?
These and more questions were answered by Dr. Mark Welch, Texas AgriLife Extension Service economist-grain marketing of College Station, at a recent crop field day held in Randall County.
“We saw an increase in grain demand the last couple years due to ethanol,” Welch said. “But with a worldwide economic slowdown, we are much more vulnerable to seeing that come down.”
Nationwide, planted acres of corn are expected to remain stable, while soybean acres are expected to increase and wheat acres are expected to decrease, he said. But in Texas, that doesn’t seem to be the case.
“Many areas of Texas had below-average yields from their grain crops this summer,” Welch said. “Producers wanting to take advantage of residual fertilizer are buying wheat seed.”
In a discussion of price projections, he said that even if prices remain steady in 2009 compared to 2008, farm returns will be squeezed by escalating input costs.
“How do we take that information and decide what to do?” Welch asked. “We have to take all those inputs and squeeze out every ounce of efficiency we can. And then have a good crop insurance program.”
With everyone approaching marketing differently and many unknown variables, such as the economy and weather, he said producers need to know what their breakeven is to cover their variable and total costs.
“You could establish a minimum price contract by working with your elevator manager, grain merchant or broker to buy a put option,” Welch said. “You’ll pay a premium to do that, but you lock in a price floor.
“Options are expensive due to price volatility and time to expiration, but they may establish the price safety net we need today given that farm program benefits are so far below the cost of production,” he said.
Producers should not focus on absolute prices, but rather on the revenue associated with the inputs, and assess the profit margin by analyzing the relative revenues and costs, Welch said.
With fertilizer costs of $930 a ton for anhydrous ammonia and higher, input costs are going to be up significantly, he said.
“Many of the returns per dollar of investment in these inputs such as fertilizer are actually better than they have been in the last few years,” Welch said. “The problem is going to be the dollars per acre you are going to spend to put the nitrogen out there. The relationship hasn’t changed but what it costs to play the game has.”
Up through 2006, wheat prices were such that they barely covered variable costs; the run up in wheat prices the last two years have returned sizeable profits for those that made a crop, he said.
“But with average yields, current prices and higher input costs, you are back down to breakeven levels for winter wheat,” Welch said.
Crop insurance should be the first step of any risk-management program, he said. While group programs are cheap and require little paperwork, they do not cover individual losses.
Another consideration, Welch said, should be a comparison of the grazing option versus grain only. With grazing, a producer is able to spread the risk, have some winter cash flow and better utilize labor. However, grazing usually requires higher input costs and can result in lower yields.
Producers need to look at what they may be giving up in grain production when negotiating grazing rates, he said.
“With higher grain prices, we need to look closely at how grazing income compensates for increased input costs and any lost grain yield,” Welch said.
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