Department of Economics Volatility Gives Rise to Fear, Greed, and Ego Farmers Forum III West Point, Nebraska February 11, 2009 Chad Hart Assistant Professor/Grain Markets Specialist

Department of Economics Price Shifts (Jan = 1)

Department of Economics Price Shifts (Sept = 1)

Department of Economics Changes in Price Volatility Source: Zulauf and Roberts, Ohio State

Department of Economics Historical Soybean Volatility Changes Source: Zulauf and Roberts, Ohio State

Department of Economics Historical Wheat Volatility Changes Source: Zulauf and Roberts, Ohio State

Department of Economics Overall Shift Source: Zulauf and Roberts, Ohio State

Department of Economics Source: Zulauf and Roberts, Ohio State

Department of Economics Source: Zulauf and Roberts, Ohio State

Department of Economics Source: Zulauf and Roberts, Ohio State

Department of Economics Source: Zulauf and Roberts, Ohio State

Department of Economics Source: Zulauf and Roberts, Ohio State

Department of Economics Source: Zulauf and Roberts, Ohio State

Department of Economics World Stocks-to-Use Ratios

Department of Economics World Wheat Stats

Department of Economics World Corn Stats

Department of Economics World Soybean Stats

Department of Economics Factors Leading to Higher Commodity Prices Source: USDA-ERS, Trostle, July 2008

Department of Economics Population (billion) World6.678World7.601World9.393 China1.330China1.431India1.808 India1.148India1.362China1.424 U.S.0.304U.S.0.336U.S Indonesia0.238Indonesia0.268Nigeria0.357 Brazil0.192Brazil0.212Indonesia0.313 Pakistan0.168Pakistan0.204Bangladesh0.280 Bangladesh0.154Bangladesh0.190Pakistan0.278 Russia0.141Nigeria0.184Brazil0.228 Nigeria0.138Russia0.132Congo0.189 Source: U.S. Bureau of the Census

Department of Economics Liquid Fuel Use Source: EIA, International Energy Outlook Million Barrels Oil Equivalent per Day United States 20.7 Canada 2.3 Mexico 2.0 Europe 15.6 Japan 5.4 China 6.4 India 2.5 Africa 2.8 Central and South America 5.4 World Percent of 2004 Value

Department of Economics Countries Pursuing Biofuels  US  Brazil  Argentina  Colombia  Paraguay  Canada  Uruguay  Mexico  Thailand  New Zealand  South Africa  South Korea  Philippines  Indonesia  Pakistan  China  India  Malaysia  Australia  Japan  EU  Russia  Not a complete list

Department of Economics Iowa Corn Prices vs. Costs Source: USDA-NASS and Duffy and Smith,

Department of Economics Iowa Soybean Prices vs. Costs Source: USDA-NASS and Duffy and Smith,

Department of Economics Ammonia Prices Source: TheMarket.pdf

Department of Economics Average Producer-Paid Premiums Nebraska Wheat

Department of Economics Average Producer-Paid Premiums Nebraska Corn

Department of Economics Average Producer-Paid Premiums Nebraska Soybeans

Department of Economics Fear, Greed, and Ego Fear 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

Department of Economics Greed Fear Ego

Department of Economics Marketing Plan To 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.

Department of Economics Marketing Objectives  Get the highest selling price  Pretty tough to do  More 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

Department of Economics Building a Marketing Plan 5 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

Department of Economics Bushels to Sell  What’s your expected production?  What do you have in storage?  What about on-farm use? Breakeven Costs  What are your production costs?  What are your storage costs?  On-farm vs. off-farm?  What are your cash flow needs?

Department of Economics Scenarios  Seasonal price trends  Weather outlook  Export picture  Livestock outlook Tools and Opportunities  Market tools: Futures, options, forward contracts  Government tools: Crop insurance, marketing loans, CCP/ACRE

Department of Economics Tentative Pricing Plan  Outline 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

Department of Economics Some Examples University of Nebraska: “Achieving Success with a Business Plan: Case Study to Prepare a Grain Farm Business Plan (CC424) University of Missouri: Purdue University: AgRisk website:

Department of Economics Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: