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combine corn harvest in field

Let’s Speculate On Corn Prices

In my area of eastern South Dakota, the corn and bean harvests are pretty much completed. Combines have been greased and cleaned and tucked away for the winter, and corn piles are being put to use as weaned calves belly up to the feedbunk. Without a doubt, the drought impacted corn yields across the country. Some growers are only harvesting crop insurance checks this year, while others had record-high yields, resulting in what is expected to be the third largest corn crop in U.S. history.

New Photo Gallery: Images From Harvest [3]

According to USDA [4], “For the 2012-13 marketing year, total corn supplies were forecast in the Oct. 11 World Agricultural Supply And corn harvest combine in field [3]Demand Estimates (WASDE) report at 11.8 billion bu. This level of supply is about 13% below 2011-12 marketing-year supplies. Season-average corn prices for the 2012-13 marketing year are forecast to fall within a range of $7.10-$8.50/bu., up from $6.20-$6.30 for 2011-12. Marketing-year corn prices in this range would be record high in nominal terms. Ending stocks for 2012-13 were reduced in the Oct. 11 WASDE to a projected 619 million bu., the lowest since 1995-96, when ending stocks were 426 million bu.”

With speculation increasing as the U.S. corn harvest nears completion, many ranchers are wondering how much it will cost them to feed their calves through the winter.

A Closer Look: Corn Crop Continues To Jangle Industry Nerves  [5]

Does all the speculation really reflect the true corn supply and demand picture, or is it simply based on public perception and emotions? Columnist Alan Guebert challenges the whole system. [6]

“If it’s a bad idea to play with matches, it’s an even worse idea to play with a blowtorch in a fireworks factory,” Guebert writes. “And yet that’s just what farmers and ranchers do every time they price their cattle, corn, cotton and other commodities in global markets dominated by high frequency trading driven by computers running algorithms developed by money-managers who don’t know cocoa beans from soybeans and don’t care. These supersonic freaks of finance, blogger Tyler Durden explained on the Zero Hedge website Oct. 2., ‘stuff quotes, front run each other, spoof, layer and generally make a mockery out of the thing formerly known as the market.’

“That these lightening fast, fabulously large, mostly unseen and nakedly speculative trades move markets is no secret; more than 100 recent academic and government studies have fingered them as the main driver in today’s neck-breaking price moves. Nor is it a secret that banks, big agbiz and traders are greasing every skid in Washington, D.C., to ensure every attempted regulation of this Big-Boy-in-the-Dark game will be fought in Congress and challenged in federal courts. Three items nearly guarantee their success in this fight: money, money and money.”

Guebert isn’t the only one scratching his head about the markets. Others are questioning the validity of forward contracting, as well.

University of Kentucky’s Cory Walters and Richard Preston say that
[7], “The 2012 corn crop has raised important questions about the validity of forward contracting. Forward contracts are a vital risk management tool because they remove price uncertainty. However, they must be used correctly to avoid increasing risk in other areas, namely yield risk. Risk stemming from revenue and costs rose dramatically in recent years. Production costs also increased dramatically, increasing the risk of losing more capital. Prices throughout the crop year varied tremendously, increasing the risk of ending up in the bottom third of prices. Farm yield risk was likely underestimated because, up until this year (especially for corn), yield has been friendly.”

While we wait for USDA’s final report on the 2012 corn harvest, I’m curious to hear how your corn crop yielded this year. Did the drought wipe out your crop, or did you experience your best year yet? Or, do you have to buy all your corn for your livestock? If so, what is it costing you? How will the escalated corn prices alter your management decisions? And, what are your thoughts about the markets? Is the commodity market system broken? Share your thoughts on all these questions in the comments section below.