Nearly six months ago in this column, I predicted $3.00 corn, while the prognosticators, experts, and second guessers were saying that the market had bottomed out – a record crop was well on its way and there should be no other news that would break the market. They were so bullish they thought the only scenario that might develop, would be that of something unforeseen causing a less than record potential harvest, thus pushing the market even higher.
These kinds of predictions aren’t unusual, and they usually come from those that have no vested interest in the market, plus they get away with it, using the rationale of being right 51% of the time. For most of us, that’s not a good enough record. To be wrong nearly 50% of the time would break the average person long before developing a 51% outcome.
To be an accurate predictor of the market, one must rst be a successful “market trader” with a vested interest in the commodity of interest. When it’s your own “blood, sweat, and tears” in the game, the outcome is more meaningful than that of just an educated guess, based on stochastic action, moving averages, trend lines, and the “gut feelings” of “open interest”. These are “barometric tools” at best, and serve to be nothing more than “guide lines”.
So the next time you take market advice from someone, make sure they have some skin in the “game”. There’s comfort in knowing that you sleep as well as they do at night.
Fortunately, there are always winners and losers, even at the $3 corn level. But after a record breaking harvest you can be sure that livestock producers and the world economy are the winners.
For crop producers it is bad news, as prices have dropped sharply since spring planting and are now well below levels that prevailed for the past several years. Unfortunately, for a sector in which land rental rates and purchase prices have soared for more than seven years, this is a scary situation.
Cheaper food will fare well for both the world economy and US consumers alike, as this will mean cheaper meat prices down the road. But not for the reason you might think, as supply doesn’t change much because of price. It’s more about “supply shift”, a change in some related factor that changes the quantities producers offer at any given price.
The “supply shifter” has been favorable weather and fence row planting in response to higher prices. Although there was drought and ood damage in a few areas, most key growing areas for corn have experienced very favorable weather.
Even though the price drops have been large, over the coming months at any given price, farmers will be willing to sell greater quantities of corn then they would have at the same price at any time in the past. Many producers are now selling for less than $3.00/bu. while they could have received about $4.50/bu. a year ago and as much as $7.00/bu. the year before that.
This is what’s called an “inelastic” supply and demand – where the changes in quantities available for sale or those actually used have changed by only a few percent. This illustrates what economists call “inelastic ” supply and demand.
“Elasticity” relates the percentage change in quantity of either supply or demand to the associated change in price. When a large change in price causes only a small change in the quantity users buy, demand is inelastic. When supply is inelastic, a small percentage change in quantity causes a much larger percentage change in price.
That is exactly what is happening now, which means that even though prices have fallen by half, farmers are still going to offer a lot of corn for sale. But because demand is also inelastic, lower prices are not going to motivate corn users to dramatically increase their usage. So PRICE SUFFERS A DOUBLE WHAMMY!
And price is what you should be concerned about when seeking advice about putting your next marketing plan together. There are those that will tell you what you want to hear. But listen to those that are educated, well informed, and have a vested interest in their convictions.
The $3.00 corn disaster could have been avoided and was avoided by those who truly understood marketing. To avoid such market catastrophes, attend one of our livestock marketing seminars.
(Editor's Note: For more in-depth information regarding the topics that have been touched upon in this report, Knightro conducts livestock marketing seminars on a regular basis. To schedule a seminar, auction, judging, or speaking engagement, please contact Ken Knight, Knightro, call or fax 715-262-8480; e-mail [email protected], or write him at: Ken Knight, Knightro Report, 136 Hillridge CT, Prescott, WI 54021.)