Market Volatilty

[charliep]

What are your thoughts about market volatility these days and impact on your business? Lots of articles about this in newsletters this week (Pro Farmer US, Agriweek, Ken Ball/Union Security).

The issues raised in the threads to date have been about price direction. One of processes every night is to take the direction/magnitude of the daily futures market closes and multiply it by the contract volumes. What scares the tar out me as a former micro speculator (one contract at a time) is the daily volatility in some contracts is more than I make every month. If you take this to a farmer hedger (or perhaps speculator) level, you have to be prepared with significant amounts of margin money. Take this to a grain company/processor and the numbers get even scarier. This also applies to the CWB.

Realize this will bring out lots of negative comments from the fringes but thought I would try to bring forward as a discussion issue for the middle of the road farmer who is looking at alternatives to help them manage the risk/profitability of their business. The volatility is making this a challenge but maybe at today's prices it doesn't matter.

[parsley]

A voice from the organic fringe. LOL

Production contracting being completed in organics. Some typical offers from companies:

HRSW #2 or better plus additional specs, $20.00 per bushel FOB farm.

Brown flax and specs $30.24/bu.(Brown flax last year was contracted at approx. 25.00 per bushel).

Golden Flax?...Don't even ask.

The question to ask is this:

"At what price can your farm make money and your banker is satisfied?"

NOT

"What does the neighbor get?"

Parsley

[charliep]

The easiest way to manage risk (at least price) is for a buyer and seller to agree to a price that meets their needs. But then we would be talking about marketing a product versus selling a commodity.

Maybe the title of this chat area explains some of our confusion. Commodity Marketing is a oxymoron similar to military intelligence, government service, etc.

[Zaphod]

Oh Charlie, you're going to get yourself in trouble with the boss yet.

[parsley]

Organics pay these buyback prices:

2007-08 OFSC rates (per tonne)


Japan EU/UK U.S. Canada

Wheat $5.20 $3.71 $3.38 $3.38

Durum $15.02 $3.38 $3.38 $3.38

Barley $3.38 $3.38 $3.83 $3.83

Desgnted $3.38 $3.38 $3.83 $3.83 bly

Who knows what they will be next year?

So why don't conventional growers insist upon the same?

Or is that too extreme a request for the whipped to make, especially being suggested by such a fringer?

Parsley

[parsley]

Cotrrection:

Barley $3.38 $3.38 $3.38 $3.38
Sorry.

Parsley

[TOM4CWB]

Parsley,

That is exactly what I asked in Master Chairman Ken Ritters meeting in Provost.

Why, on the 26th of February... when Organic Growers were required to pay $3.38/t... was I required to pay over $500/t for my wheat Export Licence from the CWB.

Answer was;... because we must obey the law...

[TOM4CWB]

Parsley,

Interesting... I heard that Viterra was offering over $25/bu for wheat a few weeks back... amazing what an export license policy change can do!

[parsley]

Viterra ..offering .. $25/bu ?

What do you mean export license policy change? Explain that, will you?

A neighbour did a buyback reecently and paid app $12.00/bu buyback.

I wonder if the CWB asked 24.50/bu buyback, if Western farmers would continue to wring their hands and moan in their sleep.

Parsley

[TOM4CWB]

Parsley,

I assumed you knew I was talking about Organic Wheat...

[TOM4CWB]

Charlie,

On your question... Grain price volatility... is directly purportional to WEATHER volatility.

SO

Where are we going with the weather... over the next 6 months?

I met with E. Ray Garnett, B.A., M.Sc. in Winnipeg at Grainworld.

Ray asked the weather folks... some VERY hard questions... that they did not answer well...

Ray has some very interesting ideas... on models to better reveal future weather patterns...

Perhaps a few invested $ in people who ask HARD questions... would be a smart investment?

http://www.members.shaw.ca/agroclime/

Check it out!

[craig]

Charlie
Trying to stick to your orginal question. This market is showing us what we have seen in past. Good prices over a long period of time brings upon complaceny. Then we get a wake up call when the market makes a big drop. At times like this I find it of value to go back to gross or net values per acre. This brings us some reality to the situation. If a gross value drop of over $200.00 per acre in a week is not a wake uo call I'm not sure what is. Gross and net value returns per acre are also a good indication of where seeded acres will tend to go. Right now in our area barley returns stink in realation to wheat. With the fund companies so heavily in the market I would suggest that prudent market strategy is to take the money and run while you can. There are to many factors besides market fundamentals at play in this market.

[TOM4CWB]

Charlie,

Here is an interesting article on causes of Volatility:

Corn demand high

Mar 13, 2008 (The Tribune - McClatchy-Tribune Information Services via COMTEX) -- Hoosier farmers should find no shortage of demand for their corn this year.

"The demand for corn in the world continues to go up as a feedstock, despite the fact that we are using more corn in the United States for ethanol," Mike Anderson told local farmers and business people Wednesday during the annual Ag Day Breakfast sponsored by the Greater Seymour Chamber of Commerce.

Anderson, president and CEO of The Andersons Inc., said the "disappearance of China as an exporter has been a big deal to so many people. We don't really know with the China stock situation, but almost every year that prices rallied, they've had a little extra to throw into the market," Anderson said. "This year not only has that not happened, they (began) their buying of corn."

With China and other developing countries improving their economy, Anderson said, they understandably want to eat more meat, and more meat takes more feed grain for more animals. The larger population increases the demand for more grains.

Demands up

The increase in demand for vegetable oil, Anderson said, is an interesting one both from a food perspective for cooking and bio-diesel. He says the United States will subsidize soybean oil produced here that is blended just a little and shipped to Europe for use in their diesel fuel, bringing in somewhere between $200 million and $300 million.

"Things that are done to stimulate new markets, to me, make a lot of sense when they are starting, but so often it is very hard for Washington to unring a bell," Anderson said. "The concept that we are subsidizing European markets' gasoline is somewhat illogical to me. The result of that is we have oil prices just absolutely go through the roof."

Prices for a gallon of regular gas Wednesday in Seymour was $3.45.

Anderson said there is no question that the demand for ethanol is a major factor into what is going on.

About 1.6 billion bushels of corn were used two years ago to make ethanol in the United States. A little more than 3 billion bushels will be used this year and within a year and a half, Anderson said, that will probably be up to about 4 billion bushels of corn.

This past year the nation produced about 6.5 billion gallons of ethanol. This year it will reach between 8 billion and 9 billion gallons. Anderson said the capacity of new ethanol plants being built right now, that aren't opened, will create a capacity of about 11 billion gallons.

Anderson said the steady growth and soybean demand throughout the world is "really something."

"If you look at corn going up over $5 a bushel, the escalation of soybean prices is needed in order to bring more soybeans back into production," Anderson said. "Even added over 10 million tons a year of demand for soybeans, we took substance production out this year in the U.S."

Over the last three years, global nutrient fertilizer usage is up by about 20 million metric tons. Anderson said that is more than double the annual growth rate of the previous 10 years.

"That growth rate is almost like adding another corn belt's worth of fertilizer usage to the world's consumption in a three-year time frame," Anderson said. "That is a huge deal, and the fact is that the industry, which was really suffering about three years ago, is not invested in extra capacity and it's going to take a while to bring that capacity up."

Government policies have had an effect on the market, he said. The Conservation Reserve Program challenged environmental land production that had a lot of support from the green industry.

"Embedded in the CRP is the ability for the Secretary of Agriculture in Washington to allow early outs with no penalties," Anderson said. "We know very well customers that sell to us have land in that program that they say they could get out without a penalty.

"The realities of today are substantially different from when the CRP was established. I hope that sometime in time that might change."

Energy Act

Anderson said the Energy Act of 2007 will dramatically affect agriculture in the United States. This bill has put in mandates to produce 30 billion gallons of ethanol.

The nation uses roughly 145 billion gallons of gasoline in the United States every year. He said it's a mandate that 20 percent of gasoline consumption be basically alternative bio-fuels. The way that's set up, he said, it's likely that half of that will come from corn and the other half from non-developed things such as cellulosic ethanol by 2021.

"I think it's great that we are supporting investment (cellulosic) even though we are in the corn-based side," Anderson said. "I do get concerned with the issue of the mandate. Within the mandate there is the ability of Washington to relax the mandate if they so desire. I think the people that put together this program have failed to adequately consider the fact that we will have the next drought.

"Fundamentally, I think we are in a great new world of agriculture," Anderson said. "I think the combination of oil and fuel and the ability to use agricultural food stocks with the driving surge in protein demand across the world will keep us in a situation where we will have higher than normal prices, have extreme volatility and that's going to drive a lot of pressure on the input prices.

"It's a great time if you've got stuff sold and it produces well and you've got your inputs bought, but for those of us in the business, ... it's going to be a challenging, fun time, a rewarding time, but it is going to be volatile."

http://news.tradingcharts.com/futures/5/3/106133535.html

[mustardman]

Charlie with all this volatility , what are your thoughts on our Ag minister eliminating need for companies to be bonded ?? How does he think this is going to be an asset for producers ??

[charliep]

Never thought I would have both tom4cwb and you on the same side. Will leave Ritz/advisors alone but likely premature (in my opinion) to talk about elimination.

Having said that, current CGC bonding only has limited application in the current environment. It covers risk of non payment after delivery and only for 90 days. Not all companies are bonded by the CGC. If I remember right, the CGC only asks for information from the grain companies once a month and only does actual audits to ensure the bond is enough to cover their inventory on an irregular basis. In fast moving markets like this, it is quite possible (and in fact likely) that the grain company bonds are not adequate.

Long term, current CGC bonding is not the answer. So that raises the question what is? Clearinghouse? Agricorp model in Ontario? Tighter rules, better surveilance, more companies and/or bigger bonds for companies that buy grain?

The original thought was about the volatility on farmers/grain companies. This is also be a cash flow draw in addition to bonding in many cases.