Published: May 29, 2008 03:26 pm            

Grain Angles: Corn, soybeans driven by energy

Originally published in the May 30, 2008, print edition.

The corn and soybean markets continue to be volatile. They are tied closely to crude oil right now. The weather has also been an issue, but there has not been a lot of volatility added due to planting delays.

In our part of the Corn Belt the crop will be planted by the time you read this. Planting progress has been tremendous in most of Minnesota. The crop has been slow to emerge but can cure itself with a warm rain and warm air temperatures.

The price of a barrel of oil soaring to $130 or more has led the corn and soybean markets higher also. As oil moves higher, the thought of more demand for ethanol and biodiesel remains high.

The solution to our energy price problem goes through the development of bio-fuels and currently the technology is based on corn and soybeans. The farm bill provides seed money for the development of cellulose ethanol to be developed which many companies in the business will begin to take advantage of.

Just like the early years of ethanol, the government will do what it can to see that bio-fuels continue to be developed. The price of oil is also making the index funds a ton of money. The funds have to keep a balanced portfolio so they continue to buy other commodities like corn and soybeans to keep a balance and stay close to what their prospectus said they would do.

The surprising thing in this market has been the lack of real activity based on planting delays. In the past there would have been no question that delays would have been enough to keep the market nervous and volatile. This season there have been other players in the market and a weather really has not taken the lead. We have a long summer ahead so that can change at any time.

There are many private estimates out there that believe once the corn began to be planted that there were more acres planted than the 86 million forecasted by the U.S. Department of Agriculture on March 31. Many believe as much as 1.5 million more acres could have been planted.

There is a lot of speculation on how the delays will impact the yield this fall. We have a lot of growing season to go and with the advances in technology I do not think the yield impact will be as great. Remember, what kind of growing season will we have? A normal season could rescue the crop; continued cold and wet, it will not be good.

The bigger issue is knowing the cost of production of corn and soybeans. We are at a crossroads in crop production. The key to the future is going to be margin management, when is it profitable and how much is the profit? Generally in the grain industry we lack the ability to know exactly what the cost of production is. Our variable costs are skyrocketing as well as machinery and land.

We all have a way to justify land rents and land values if purchases are being made or rents are being negotiated. The temptation of doing some of these things could be controlled if we knew our margin goals. I will not do anything unless it is profitable should be the mind set. The competition is forcing us to make decisions that could be unprofitable. I know of many who know their cost of production to the last penny but they are outnumbered by the rest.

        

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