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A fair price for corn

Agriculture.com Staff 09/19/2008 @ 1:21pm

After a wild year of price volatility, a question many are asking is, "What is a fair price for corn?" Currently, corn futures are valued near $5.50 on December futures. This is an improvement from last year's harvest price of near $4.00. Yet, after trading close to $8.00, a decline of 31% does not look so rosy, especially with production costs rapidly rising.

From a historical analysis, commodity markets, especially agriculture, have a tendency to price themselves near the cost of production. If true, then a fair price for corn may be somewhere closer to $4.50 or $5.00 cash, the projected cost range to produce a bushel in 2009. So, if cash prices need to average $4.75, using a 35 cent basis, that would suggest corn futures should probably gravitate toward the low $5.00 range on futures. In August, the USDA Supply and Demand report had a negative supply tone and, after starting the day weaker bottoming at $5.02, managed to post a bullish key reversal upward. The market voted that prices were too low.

Another analysis also points to a low near $5.00. Typically, corn prices move approximately 25% to 35% from their high to low price during the year. December corn futures peaked at $8.00 and recently bottomed near $5.00, or 37.5% from the summer high price. The higher the price rally, the more likely the estimated range of high to low will increase. Therefore, 37.5% makes sense.

So in the end, corn prices may hover near $5.00 as a new plateau. Unless input prices cheapen significantly (there does not appear to be much sign this will be the case anytime soon) or demand drops, it is unlikely that corn futures will move much below $5.00 futures. If price is below breakeven prior to planting, corn producers will switch to another commodity, likely soybeans. In turn, corn prices will rally. Most producers would like at least a 20% return on investment prior to making forward sales. That suggests over a $1.00 rally for 2009 corn or a move to over $6.50. This move would also reflect uncertainties for the year ahead as well as a possible fight for acres.

If you have questions or comments, contact Bryan Doherty at Top Farmer at 1-800-TOP-FARM ext. 129.

After a wild year of price volatility, a question many are asking is, "What is a fair price for corn?" Currently, corn futures are valued near $5.50 on December futures. This is an improvement from last year's harvest price of near $4.00. Yet, after trading close to $8.00, a decline of 31% does not look so rosy, especially with production costs rapidly rising.

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