Participants warned to get used to price volatility

By SEAN CLOUGHERTY
Managing Editor

HARRINGTON, Del. — Volatility in the commodities market is “here to stay,” veteran grain market experts told farmers last week during Delaware Agriculture Week’s grain marketing session.
Ben George, a commodities trader at the Chicago Board of Trade, said numerous factors have increased market volatility, the advent of electronic trading being a main one. Electronic trading allowed for much quicker trading, reporting and easier reactions to market changes but also rapidly expanded the number of traders and added anonymity to trading.
“It allows someone who decides to get out of a trade to get out of that trade without regard to disrupting the market,” George said.
Prior to electronic trading, pit traders in the commodities exchange handled all the trades and were fined or suspended for being a disruptive trader and if the behavior repeated, they would be forced out, George said.
Expanded crop production is another factor adding volatility.
“As crop production increases, risk increases,” George said. “Quite simply, bigger crops mean bigger hedges, more storage and therefore more trading.”
John Ade, vice president of grain sales and marketing at Perdue, urged farmers to take a cautious approach to marketing their coming grain crops.
“High prices create a lot of opportunities but I think this is one of those years where you want to be pretty careful as you move forward,” he said. “This volatility is here to stay. It’s something we’re all going to live with in one way or another.”
Ade’s recommendation to farmers contracting grain was to price no more than half of this year’s crop and about 25 percent of next year’s crop as a way to manage risk.
Ade said Midwest growers have their fall nitrogen applied to corn ground and fair weather at planting season could make for a record breaking corn crop.
“We’re hearing numbers anywhere from 95 million to up to 100 million acres of corn this year,” Ade said. That increase would come out of acres released from the Conservation Reserve Program and decreases in soybean and wheat acres he added. “You start talking about 96, 97 million acres and we can produce a fairly good corn crop.”
Last year, U.S. farmers planted 92.3 million acres of corn, according to USDA.
Increases in livestock production in China and its people adding more protein to their diets, would support corn demand though the nation’s growth could also be stymied if crude oil increases exceed $120 a barrel. Sluggish demand from suffering U.S. beef and poultry industries could also maintain a strong corn supply domestically, Ade added, and world corn production appears to be increasing as farmers around the world look to capitalize on corn prices.
Ade also suggested USDA’s estimate of 5 billion bushels of corn going to ethanol production could be too high, keeping more corn on the market.
Since September, ethanol production has been on a record pace that would exceed the 13.2 billion gallons federally mandated for 2012 and if production backs off, “there could potentially be a couple hundred million bushel that this number might be overstating,” Ade said.
Advances in efficiency in making ethanol could use less corn as well.
Right now, USDA uses a 2.7 gallons per bushel conversion rate in making reports and estimates.
“We would expect that to creep a little higher without any added production,” Ade said.
At the end of last year, the Environmental Protection Agency estimated 2012 ethanol production to reach 15.2 gallons, which would be an increase of 1.4 billion gallons from 2011.