department of economics volatility gives rise to fear, greed, and ego farmers forum iii west point,...

Department of Economics

Volatility Gives Rise to Fear, Greed, and Ego

Farmers Forum IIIWest Point, Nebraska

February 11, 2009

Chad HartAssistant Professor/Grain Markets Specialist

[email protected]


Price Shifts (Jan. 2007 = 1)

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Dow Oil Corn Soybeans


Price Shifts (Sept. 2008 = 1)

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Changes in Price Volatility

Source: Zulauf and Roberts, Ohio State


Historical Soybean Volatility Changes



Historical Wheat Volatility Changes



Overall Shift


Department of EconomicsSource: Zulauf and Roberts, Ohio State


World Stocks-to-Use Ratios

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Corn Soybeans Wheat


World Wheat Stats

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World Corn Stats

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Factors Leading to Higher Commodity Prices

Source: USDA-ERS, Trostle, July 2008


Population2008 2020 2050

(billion) (billion) (billion)World 6.678 World 7.601 World 9.393

China 1.330

China 1.431

India 1.808

India 1.148

India 1.362

China 1.424

U.S. 0.304 U.S. 0.336 U.S. 0.420Indonesia 0.238

Indonesia 0.268

Nigeria 0.357

Brazil 0.192

Brazil 0.212

Indonesia 0.313

Pakistan 0.168

Pakistan 0.204

Bangladesh 0.280

Bangladesh 0.154

Bangladesh 0.190

Pakistan 0.278

Russia 0.141

Nigeria 0.184

Brazil 0.228

Nigeria 0.138

Russia 0.132 Congo 0.189

Source: U.S. Bureau of the Census


Liquid Fuel Use

Source: EIA, International Energy Outlook 2007

2004 Million Barrels Oil Equivalent per Day

United States 20.7Canada 2.3Mexico 2.0Europe 15.6Japan 5.4China 6.4India 2.5Africa 2.8Central and South America 5.4World 82.5

2010 2015 2020 2025 2030 Percent of 2004 Value

103 109 115 121 129100 100 104 104 104110 115 130 135 145 99 99 100 101 101 96 96 96 96 96147 164 186 213 245108 128 144 160 176118 139 154 164 175120 137 152 167 180110 118 126 134 143


Countries Pursuing BiofuelsUSBrazilArgentinaColombiaParaguayCanadaUruguayMexico

ThailandNew ZealandSouth AfricaSouth KoreaPhilippinesIndonesiaPakistanChina

IndiaMalaysiaAustraliaJapanEURussia

Not a complete list


Iowa Corn Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Iowa Soybean Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Ammonia Prices

Source: http://www.fertilizerworks.com/html/market/TheMarket.pdf


Average Producer-Paid PremiumsNebraska Wheat

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Average Producer-Paid PremiumsNebraska Corn

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Average Producer-Paid PremiumsNebraska Soybeans

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Fear, Greed, and EgoFear of making a bad decision

-- Watching prices slip away as you wait

Greed of expecting even higher prices-- Not taking advantage of good price opportunities

Ego of wanting to claim you caught the market high-- “Lake Wobegon” marketing

Much of the following discussion comes from the online Advanced Grain Marketing course from Iowa State University


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Greed Fear

Ego


Marketing PlanTo avoid fear, greed, and ego dominating your marketing, have a plan and stick to it.

A marketing plan outlines your market strategy and your marketing objectives.

It should examine marketing opportunities before and after harvest.


Marketing Objectives

Get the highest selling pricePretty tough to doMore realistic objective: Obtain better than average prices

Reduce price risk

Cover cash flow needs

Minimize tax liability

Look at short and long-term goals for your business


Building a Marketing Plan5 basic steps:

Estimate number of bushels to sell

Calculate breakeven price

Project price and yield scenarios

Compare pricing tools and analyze market opportunities

Develop a pricing plan


Bushels to SellWhat’s your expected production?What do you have in storage?What about on-farm use?

Breakeven CostsWhat are your production costs?What are your storage costs?

On-farm vs. off-farm?What are your cash flow needs?


ScenariosSeasonal price trendsWeather outlookExport pictureLivestock outlook

Tools and OpportunitiesMarket tools: Futures, options, forward contractsGovernment tools: Crop insurance, marketing loans, CCP/ACRE


Tentative Pricing PlanOutline realistic pricing targets

Have periodic price targets and quantities to sell

Have patience and be willing to reevaluate price goals

Remember it’s hard to lose money when making a profit


Some ExamplesUniversity of Nebraska:“Achieving Success with a Business Plan: Case Study to Prepare a Grain Farm Business Plan (CC424)

University of Missouri:http://extension.missouri.edu/explore/agguides/agecon/g00600.htm

Purdue University:http://www.agecon.purdue.edu/extension/sbpcp/resources/mrktplan.xls

AgRisk website:http://www.agrisk.umn.edu/library1/a0000037.pdf


Thank you for your time!

Any questions?

My web site:http://www.econ.iastate.edu/faculty/hart/

Iowa Farm Outlook:http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/

Ag Decision Maker:http://www.extension.iastate.edu/agdm/

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