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Cost of production will remain key for producers, marketing analyst says

Agriculture.com Staff 07/28/2006 @ 2:10pm

If you're looking forward to the nearing end of volatility in the crop markets, don't hold your breath.

Months after the U.S. weathered the most costly hurricane season in generations, sensitivity to weather events, heightened by more recent forecasts for a bumpy hurricane season for 2006, still looms over the marketplace today. Combined with surging prices in other markets -- namely petroleum -- the volatile markets have created an attractive arena for speculating investors looking to quickly capitalize on a quick price spike.

As a result, according to Brian Burke, Archer Daniels Midland (ADM) marketing analyst in Decatur, Ill., today's crop market volatility is showing no signs of relenting and in many ways is feeding even greater volatility in the near future.

"Speculators are entering the market because of volatility. And, that's in turn creating more volatility," Burke said this week. "I see volatility like that increasing over the next 18 months."

The expansion of ethanol production to meet increasing consumption mandates around the country, while creating many new marketing opportunities for corn growers, has in one way become restrictive, Burke said. It's happened through the growing spot market for ethanol, as supply continues to lag behind the growing demand. The resulting gap between ethanol supply and demand has created a growing resale market among fuel retailers.

"We're in a very serious stage of transition right now," Burke said. "What's creating the price (as high as $3.95 per gallon) is the resale of ethanol among energy companies, not manufacturers. The spot market is unfair for manufacturers. It's about as political as anything.

"When production facilities are coming online now, their production is booked for a year."

In view of these circumstances, Burke advises producers to look inward first in making marketing decisions. The volatile marketplace holds promise for forward-contracting, while crop insurance should remain a staple element of every operation, he said.

"First thing, know your production costs. The market right now does have some attractive elements," Burke said. "Use crop insurance as a tool to give you more room to be aggressive in moving forward."

If you're looking forward to the nearing end of volatility in the crop markets, don't hold your breath.

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