Crop Value and Volatility in a New Era

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1 Crop Value and Volatility in a New Era Scott Irwin sirwin@illinois.edu University of Illinois The Profitability of Illinois Agriculture: Looking Ahead in Extraordinary Times

2 Prices have changed so much for what we sell and buy that it is almost impossible to feel confident in the decisions you make. -- Agriculture Online, July 5, 2008

3 6 Monthly Farm Price of Corn in Illinois, January November 2008* 5 Price ($/bu.) Avg.=$ Avg.=$ Month/Year *November: mid-month

4 8 Monthly Farm Price of Corn in Illinois, January November 2008 and Projected Future Range* 7 $6.70 (H) Price ($/bu.) $4.60 (A) $3.00 (L) 1 0 Avg.=$1.28 Avg.=$ Month/Year *H: High, A: Average, L: Low

5 20 Monthly Farm Price of Soybeans in Illinois, January November 2008 and Projected Future Range* $17.56 (H) 16 Price ($/bu.) 12 8 $10.58 (A) $7.51 (L) 4 0 Avg.=$2.63 Avg.=$ Month/Year *H: High, A: Average, L: Low

6 12 Monthly Farm Price of Wheat in Illinois, January November 2008 and Projected Future Range* 10 $10.15 (H) Price ($/bu.) $5.80 (A) $3.30 (L) 2 0 Avg.=$1.77 Avg.=$ Month/Year *H: High, A: Average, L: Low

7 Take Home Points: Part 1 Evidence suggests that prices are likely establishing a higher average $3 corn, $8 soybeans, and $3.50 wheat are not inconsistent with new price range Prices can quickly rebound to much higher levels (see 73-75!) Concern: Long-lasting, world-wide economic contraction

8 70 Monthly Farm Price of Hogs in Illinois, January November Price ($/cwt.) Avg.=$19.18 Avg.=$ Month/Year

9 160 Weekly Crude Oil Futures Price and Corn Price at Iowa Ethanol Plants, 01/26/07-12/05/ Crude Oil Price ($/bbl.) 0 1/26/07 3/23/07 5/18/07 7/13/07 9/7/07 11/2/07 12/28/07 2/22/08 4/18/08 6/13/08 8/8/08 10/3/08 11/28/ Corn Price ($/bu.) Crude Oil (left scale) Corn (right scale)

10 Relationship Between Nearby Crude Oil Futures Price and Corn Price at Iowa Ethanol Plants, 01/26/08-12/05/08 Corn Price ($/bu.) y = x R 2 = Crude Oil Price ($/bbl.)

11 Crude Oil Gasoline Ethanol Corn

12 160 Weekly Crude Oil Futures Price and RBOB Gasoline Futures Price, 01/26/07-12/05/ Crude Oil Price ($/bbl.) Gasoline Price ($/gal.) 4.00 Gasoline (right scale) Crude Oil (left scale) /26/07 3/23/07 5/18/07 7/13/07 9/7/07 11/2/07 12/28/07 2/22/08 4/18/08 6/13/08 8/8/08 10/3/08 11/28/08

13 4.00 Relationship Between Weekly Crude Oil Futures Price and RBOB Gasoline Futures Price, 01/26/07-12/05/08 Gasoline Price ($/gal.) y = x R 2 = Crude Oil Price ($/bbl.)

14 4.00 Weekly RBOB Gasoline Futures Price and Ethanol Price at Iowa Plants, 01/26/07-12/05/ Gasoline Price ($/gal.) Ethanol Price ($/gal.) 4.00 Gasoline (left scale) Ethanol (right scale) /26/2007 3/23/2007 5/18/2007 7/13/2007 9/7/ /2/ /28/2007 2/22/2008 4/18/2008 6/13/2008 8/8/ /3/ /28/2008

15 Relationship Between Weekly RBOB Gasoline Futures Price and Ethanol Price at Iowa Plants, 01/26/07-12/05/ Ethanol Price ($/gal.) y = 0.67x y = x R 2 = Gasoline Price ($/gal.)

16 8.00 Weekly Ethanol and Corn Prices at Iowa Plants, 01/26/07-12/05/ Ethanol (right-scale) Corn Price ($/bu.) /26/07 3/23/07 5/18/07 7/13/07 9/7/07 11/2/07 12/28/07 2/22/08 4/18/08 6/13/08 8/8/08 10/3/08 11/28/ Ethanol Price ($/gal.) Corn (left-scale)

17 8.00 Relationship between Corn and Ethanol Price at Iowa Plants, 01/26/07-12/05/08 Corn Price $/bu.) y = x R 2 = Ethanol Price ($/bu.)

18 Computing the Maximum Price that an Ethanol Processor Can Bid for a Bushel of Corn Gross Revenue: Ethanol: $1.50/gal x 2.8 gal./bu. = DDGS: $120/ton/2,000 x lbs./bu. = Total Non-Corn Costs Variable Fixed Total Maximum Bid Price for Corn $4.20/bu. $1.06/bu. $5.26/bu. $1.34/bu. $0.56/bu. $1.90/bu. $3.36/bu.

19 8.00 Weekly Price of Corn and Maximum Bid Price at Iowa Ethanol Plants, 01/26/07-12/05/ Maximum Bid Price Market Price Price ($/bu.) /26/07 3/23/07 5/18/07 7/13/07 9/7/07 11/2/07 12/28/07 2/22/08 4/18/08 6/13/08 8/8/08 10/3/08 11/28/08

20 Fundamental Values Relative to Ethanol Ethanol Corn Soybean Wheat Price Price Price Price $/gal. $/bu. $/bu. $/bu

21 Fundamental Values Relative to Ethanol Ethanol Corn Soybean Wheat Price Price Price Price $/gal. $/bu. $/bu. $/bu

22 Take Home Points: Part 2 Ethanol processors are the marginal bidders for corn in the short- to intermediate-run Volatility in energy markets is transmitted directly into agricultural markets Each step of the energy chain between crude oil and corn is a source of risk Energy policies will play a key role in determining ethanol prices in 2009

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