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
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
6 Monthly Farm Price of Corn in Illinois, January 1947- November 2008* 5 Price ($/bu.) 4 3 2 1 0 47 52 Avg.=$1.28 57 62 67 72 77 82 Avg.=$2.42 87 92 97 02 07 Month/Year *November: mid-month
8 Monthly Farm Price of Corn in Illinois, January 1947- November 2008 and Projected Future Range* 7 $6.70 (H) Price ($/bu.) 6 5 4 3 2 $4.60 (A) $3.00 (L) 1 0 Avg.=$1.28 Avg.=$2.42 47 52 57 62 67 72 77 82 87 92 97 02 07 12 Month/Year *H: High, A: Average, L: Low
20 Monthly Farm Price of Soybeans in Illinois, January 1947- 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.=$6.15 47 52 57 62 67 72 77 82 87 92 97 02 07 12 Month/Year *H: High, A: Average, L: Low
12 Monthly Farm Price of Wheat in Illinois, January 1947- November 2008 and Projected Future Range* 10 $10.15 (H) Price ($/bu.) 8 6 4 $5.80 (A) $3.30 (L) 2 0 Avg.=$1.77 Avg.=$3.74 47 52 57 62 67 72 77 82 87 92 97 02 07 12 Month/Year *H: High, A: Average, L: Low
Take Home Points: Part 1 Evidence suggests that prices are likely establishing a higher average $3 corn, $8 soybeans, and $3.50 wheat are not inconsistent with new price range Prices can quickly rebound to much higher levels (see 73-75!) Concern: Long-lasting, world-wide economic contraction
70 Monthly Farm Price of Hogs in Illinois, January 1947- November 2008 60 50 Price ($/cwt.) 40 30 20 10 Avg.=$19.18 Avg.=$44.74 0 47 52 57 62 67 72 77 82 87 92 97 02 07 Month/Year
160 Weekly Crude Oil Futures Price and Corn Price at Iowa Ethanol Plants, 01/26/07-12/05/08 140 120 100 80 60 40 20 Crude Oil Price ($/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 11/28/08 8.00 7.00 6.00 Corn Price ($/bu.) Crude Oil (left scale) Corn (right scale) 5.00 4.00 3.00 2.00 1.00 0.00
Relationship Between Nearby Crude Oil Futures Price and Corn Price at Iowa Ethanol Plants, 01/26/08-12/05/08 Corn Price ($/bu.) 8.00 7.00 6.00 5.00 4.00 3.00 y = 0.0369x + 1.0025 R 2 = 0.7409 2.00 40 60 80 100 120 140 160 Crude Oil Price ($/bbl.)
Crude Oil Gasoline Ethanol Corn
160 Weekly Crude Oil Futures Price and RBOB Gasoline Futures Price, 01/26/07-12/05/08 140 120 100 80 60 40 20 3.50 3.00 2.50 2.00 1.50 1.00 0.50 Crude Oil Price ($/bbl.) Gasoline Price ($/gal.) 4.00 Gasoline (right scale) Crude Oil (left scale) 0 0.00 1/26/07 3/23/07 5/18/07 7/13/07 9/7/07 11/2/07 12/28/07 2/22/08 4/18/08 6/13/08 8/8/08 10/3/08 11/28/08
4.00 Relationship Between Weekly Crude Oil Futures Price and RBOB Gasoline Futures Price, 01/26/07-12/05/08 Gasoline Price ($/gal.) 3.50 3.00 2.50 2.00 1.50 y = 0.0212x + 0.4807 R 2 = 0.8508 1.00 40 60 80 100 120 140 160 Crude Oil Price ($/bbl.)
4.00 Weekly RBOB Gasoline Futures Price and Ethanol Price at Iowa Plants, 01/26/07-12/05/08 3.50 3.00 2.50 2.00 1.50 1.00 0.50 3.50 3.00 2.50 2.00 1.50 1.00 0.50 Gasoline Price ($/gal.) Ethanol Price ($/gal.) 4.00 Gasoline (left scale) Ethanol (right scale) 0.00 0.00 1/26/2007 3/23/2007 5/18/2007 7/13/2007 9/7/2007 11/2/2007 12/28/2007 2/22/2008 4/18/2008 6/13/2008 8/8/2008 10/3/2008 11/28/2008
Relationship Between Weekly RBOB Gasoline Futures Price and Ethanol Price at Iowa Plants, 01/26/07-12/05/08 4.00 3.50 Ethanol Price ($/gal.) 3.00 2.50 2.00 1.50 y = 0.67x + 0.51 y = 0.4484x + 1.0097 R 2 = 0.6274 1.00 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Gasoline Price ($/gal.)
8.00 Weekly Ethanol and Corn Prices at Iowa Plants, 01/26/07-12/05/08 7.00 Ethanol (right-scale) 6.00 5.00 4.00 Corn Price ($/bu.) 3.00 2.00 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 11/28/08 3.00 2.75 Ethanol Price ($/gal.) Corn (left-scale) 2.50 2.25 2.00 1.75 1.50 1.25
8.00 Relationship between Corn and Ethanol Price at Iowa Plants, 01/26/07-12/05/08 Corn Price $/bu.) 7.00 6.00 5.00 4.00 3.00 y = 2.6914x - 1.2926 R 2 = 0.6664 2.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 Ethanol Price ($/bu.)
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 17.75 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. $3.36/bu.
8.00 Weekly Price of Corn and Maximum Bid Price at Iowa Ethanol Plants, 01/26/07-12/05/08 7.00 Maximum Bid Price 6.00 5.00 4.00 Market Price Price ($/bu.) 3.00 2.00 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 11/28/08
Fundamental Values Relative to Ethanol Ethanol Corn Soybean Wheat Price Price Price Price $/gal. $/bu. $/bu. $/bu. 1.20 2.11 5.16 2.63 1.30 2.52 6.16 3.14 1.40 2.93 7.17 3.66 1.50 3.34 8.17 4.17 1.60 3.75 9.18 4.68 1.70 4.15 10.18 5.19 1.80 4.56 11.18 5.71
Fundamental Values Relative to Ethanol Ethanol Corn Soybean Wheat Price Price Price Price $/gal. $/bu. $/bu. $/bu. 1.20 10 2.11 40 5.16 100 2.63 50 1.30 2.52 6.16 3.14 1.40 2.93 7.17 3.66 1.50 3.34 8.17 4.17 1.60 3.75 9.18 4.68 1.70 4.15 10.18 5.19 1.80 4.56 11.18 5.71
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