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Roy Smith: A new plateau
My schedule of winter meetings starts next week with “Winning the Game” Workshops at Wilcox and Franklin NE on January 18. In preparing for these educational meetings the team is always looking for ways to illustrate marketing principles. In preparing for the meetings last year we developed a way to illustrate the principle that grain prices may have reached a new plateau.
To accomplish this, we graphed the price of December corn futures and November soybean futures on the day they quit trading. In looking at the graph, with a little imagination it was possible to show that indeed prices had reached a new plateau. For soybeans from 1980 through 2005 the average price of November soybean futures at expiration was $6.08. From 2006 through 2009 the average was $8.96.
Likewise for corn from 1980 through 2005 the average at expiration was $2.41. From 2006 through 2009 the average was $3.79. Plotting these prices in a graph, it is easy to draw the conclusion that new price levels have been reached. It would be easy to conclude that corn futures prices should be supported at $3.50 and soybean prices should be supported at $9.00.
In 2011, however, something strange happened on the way to utilizing this information to trigger forward sales of corn and beans. When the smoke cleared on the 2011 contract prices, the prices on the expiring contracts fell above the previous highs and far above the previous averages.
If my observations are correct, December 2011 corn futures expired at $5.86. November 2011 soybeans went off the board at $12.01. That brought the average for he last five years to $4.23 for corn and $9.57 for soybeans. Prices that looked extremely high prior to 2006 would look like disaster if the elevator bids were suddenly to go back to that level.
The question becomes whether the prices we are seeing today represent another new plateau. I was farming when the latest jump to a new average level occurred in 1972-1973. From 1973 to 2005 is 32 years. It hardly seems possible that a new level could be reached in five short years.
If prices would go back to the average of the last five years most farmers would probably survive. However, if prices would drop back to the level of 2006-2009, it would be tough going with the increase in production costs that are now built in. We are in a time with many of unknowns.
Those of us who experienced the previous shift of price parameters in the 1970’s know that, where price are concerned, what goes up does not necessarily have to come down. What happened at back then, instead of grain prices dropping, input costs went up enough to take away most of the profit. In looking at the prices of the crop inputs I recently purchased for the 2011 crop, the move is already underway!