Filed under: Ag education, Corn, Farm, food, history | Tags: Agriculture education, chicago board of trade, Corn, corn chips, corn flakes, corn prices, farm, field corn, Food, food costs
The city announcers are telling the woeful story of higher food prices to come. They are telling everyone that because corn prices are going up dramatically we will be having higher food prices soon. Here is why they are wrong.
Although field corn seems to be in about everything, it is only a small part of those items. The only foods that will be majorly affected by higher corn prices are things like corn chips and corn flakes, and most of those are priced already for some time to come. They also only have about 5 to 10 cents of corn in that $3 box or bag.
Buyers of commodities like corn use the Chicago Board of Trade to “lock in” their needs for some time to come in the future. They will buy massive amounts of corn as “contracts,” in 5000 bushel lots, when prices are low, and sell those same “contract” bushels when they actually buy corn. Thus they can even out the cost of the corn they need. They can hold off the day they really have to pay up for higher priced corn. If the price of corn goes down as it usually does at harvest, you can be sure they will be buying more corn.
Many growers of corn for items like corn flakes and corn chips grow special types of corn under specialty contracts. These contract prices have already been set for this year. They may go up for next year if there is a shortage of corn produced, but buyers resist changing the price too fast.
The price of corn does not directly reflect the price of meat. Grains like corn, wheat and barley are a major part of the rations of chickens, turkeys and pigs, and to a lesser extent cattle. Most producers of these animals either raise their own grain or buy it on the open market. They lock in their grain needs just like the producers of corn flakes do. The next generation of meat animals may require higher prices, but this one is set.
It takes time for the price of grain to cause a price change in meats, and usually the first effect of higher priced grain is for the price of meat to go down. Producers of meat animals will discontinue production of meat animals if they cannot make money as their input costs go up. This will mean that the mothers of these meat animals will be sold into the slaughter market to cut losses for producers. This will create an initial drop in the price of meat products before it goes up if demand remains constant. The exact opposite occurs as profitability goes up and more livestock are kept out of market for breeding purposes.
There are many reasons for food prices to go up, and you can be sure that your grocer will use any and all of them to tell you why you must pay more for food. The fact remains that the farmer only gets about 10 cents of your food dollar. If commodity prices were to double on the farm, you could expect only a 10% increase in food costs. Anything over that is going to someone else along the food supply chain.
Filed under: Biofuels, Corn, ethanol, Farm | Tags: biofuels, Corn, corn market, corn prices, farm, marketing, weather
The market lately has been quite good for corn, perhaps better than many would guess, but it is not good enough for farmers, and so far they seem to have the upper hand.
I stopped in at our local ethanol plant today and had a talk with their corn buyer. He is having trouble getting farmers to cut loose and sell corn. The ethanol plant is not running out of corn, but he is not buying as much as he expected. At this time of year he would like to have most of the corn he needs for next October under contract, for quite a few years he has been able to do just that, but not this year. As of now he only has 10% of his October needs under contract.
Near by months are also contracted below where he would like to see. At the moment they are emptying bins that they had hoped would not be needed until spring. Why the trouble buying corn? They have the best price in the area, there should be no trouble getting all the corn they need. Farm storage is full and just waiting for sales to be made.
Today a little of that corn was purchased. The corn market passed a phycological level. His bid was over $6 at market close. The phone started ringing with people wanting to sell corn.
The phycology of the market is huge as far as farm folks are concerned. Yes, they realize that demand is down. Yes, they know that corn is selling at higher levels than it used to in the years before 2010. Farm folks have read all of those articles by farm price prognosticators saying that corn prices must go down. They understand that selling corn at a price so close to that of wheat cannot continue. The fact is, that corn is not selling at prices that were received last year at this time. Farm folks want those higher corn prices, and are willing to hold corn for now to get them.
It is a high stakes game of chicken. Many farm folks have penciled in $7 corn on their budget for the coming year and promised a premium price to rent or buy farm land, a price that must have $7 corn to be profitable. Now that $7 corn looks like it will not come back, they are holding on to the corn they now own in hopes of a better price. What if that day does not come.
Currently, end users of corn are bidding up in hopes of shaking some of that corn loose. As long as the corn market continues in its present sideways trend they will continue to do so. What is going to happen when we break out of that trend?
I have to admit it, there is a slim possibility that prices will go up again. Corn demand could return to the levels it was a year ago and we could see $7 or higher corn prices return. The drought in the central parts of the U.S. could reassert itself, or floods could return with the spring, and lower crop yields again in 2012. As long as the market sees some possibility of crop failures in other parts of the world, the market will continue to trend sideways, or even go up. But you have to feed the bull everyday, without daily bad news, the market will go down.
There is more potential for the corn market to go down. When corn and wheat prices stay too close together, livestock feeders turn to wheat as a cheaper substitute, thus raising wheat prices and lowering corn prices. Local corn is coming out of the bin at higher than average test weight and it will not take as many bushels to provide consumer needs. Some of the factors that have propped up the ethanol market for so long are soon to expire, and higher cost ethanol producers could go out of business, thus reducing corn demand. With higher meat prices, many families are reducing their meat consumption, this lowers the demand even further for corn. Year to year trends suggest that corn prices should be going down soon as speculators shift their focus to planting intentions and away from crop conditions in other parts of the world.
When will this game of chicken end? Who knows? I really am expecting a drop in the market soon, maybe even starting before the new year. If prices start to drop, I’m afraid they will continue down for some time.
For my part, I am taking advantage of the recent increase in prices to sell more of my 2011 crop. I have not yet priced any of my 2012 crop, but that is usual for me. I may just sell some corn under a minimum price contract to hedge against a price drop. Then, I’m going to sit back and watch for a while. I have enough corn and soybeans sold to cover my needs for planting. Any further sales are not needed today, I can afford to speculate on the future.
Let the game of chicken begin. I get to watch.
Michael
