Should poultry producers wait for lower grain prices?

With the price of key poultry feed ingredients at levels not seen since 2010, livestock operations need to consider risk management strategies prior to the growing season. The analyst continually hears, ‘How much lower can it go?’ or ‘Why risk summer weather when prices are so low?’ The best answer to those questions comes from simply looking at historical price movements and using that information as a predictor of market potential.

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Buyers should have a plan in place for buying feed grains before the summer volatilty. | Bigstock
Buyers should have a plan in place for buying feed grains before the summer volatilty. | Bigstock

With the price of key poultry feed ingredients at levels not seen since 2010, livestock operations need to consider risk management strategies prior to the growing season. The analyst continually hears, "How much lower can it go?" or "Why risk summer weather when prices are so low?" The best answer to those questions comes from simply looking at historical price movements and using that information as a predictor of market potential.

Several assumptions that all commodity buyers believe simply do not hold true when put to the test:

  1. If the new crop is a bad one, prices are headed higher. When testing that fact, it simply does not hold true that poor yields assure higher prices in the fourth quarter.
  2. The counterargument is also suspect. Good crops do not assure significantly lower prices. However, there has not been a significant bull market in the face of a good crop.

Experience suggests most buyers are not as good at “watching it” as they think. Continually, buyers report they are not going to take action now but will “watch it.” That applies to weather developments, technical signals, exchange rates and other potential market drivers. Once everyone “sees it,” the market has moved.

Grain futures trading ranges

Given where corn futures prices are on April 1, what is the expected range of trading of the December futures during Q4 of 2016? Based upon percentage price changes, what are the probable outcomes?

Let’s look at futures prices since 1996. This data provides a 20-year history and excludes earlier years that were prior to “Freedom to Farm” in the 1996 farm bill.

  • Poor or excellent yields do not always result in the expected price movement
  • Only four of 20 years prices in Q4 did not trade at or below the April price ($3.55 in 2016)
  • 50 percent of the years saw declines of 55 to 60 cents putting December corn at $3 in 2016

The corn buyer’s response

Interestingly, the two years with the largest rallies were not poor crop years. Both 2006 and 2010 were years where growing demand from ethanol reduced stocks despite relatively good corn crops. The rally in 2010 was from relatively low prices in April 2010, which allowed for a significant run. Other “low price” years were 1998 and 2015 if low price is simply defined as price versus the average of the previous two years. It should be noted that 2016 would be considered a “low price” year given that definition.

Buyers who are simply market-focused should not be extending positions when there are very high odds of lower corn prices in the fall. However, decisions may be made based upon plan favorability or simply locking in good margins.

corn-futures-trading-ranges

Growing demand from ethanol reduced stocks in 2006 and 2010 in spite of relatively good corn crops. 

The soybean meal market result

  • Poor or excellent yields do not always result in the expected price movement
  • Only five of 20 years prices in Q4 did not trade at or below the April price ($270 in 2016)
  • 30 percent of the years saw declines of $70 putting December meal at $200 in 2016

The soybean meal buyer’s response

Given a decision to extend meal or corn, the data suggests meal has a smaller probability of significant decline. However, the odds still suggest lower prices into the fourth quarter of 2016.

Again, buyers that are benchmarked versus market should not extend cover given this analysis. However, the business strategies differ and the desire to avoid the upside risk should not be ignored.

soybean-meal-futures-trading-ranges

The data suggests lower soybean meal prices into fourth-quarter 2016.

Strategize on grains before summer

Buyers should codify a strategy before the summer volatilty. If current values provide expected profitability and risk aversion is of value to your business, purchases could make sense at current levels. If your organization has a trader’s mindset or benchmarks costs to eventual market prices, there are high odds that purchases near the April 4 level have a high probability of being under water in fourth-quarter 2016.

 

Learn more:

How to manage poultry feed ingredient changes, www.WATTAgNet.com/articles/26454

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