Feed Outlook
Feed prices have risen dramatically over the
past few months in accordance with corn prices. There are some
analysts who suggest that an anticipated glut in DDGS (distillers
dried grains with solubles) will eventually reduce the price of
feed, but so far that still appears to be well in the future.
For now, what is the outlook for feed prices?
If you tie feed prices to corn prices, it appears
that there will be a lot of uncertainty this year. There are 2
levels of uncertainty - one more short run and one longer term.
In the near term, yield reducing weather this spring or summer
could send corn prices to record levels. Alternatively, an expected
or trend yield this year would likely bring about an increase
in ending stocks and prices could edge lower as the growing season
progresses. But continued strong demand will likely keep prices
from falling back to levels seen in 2006. So I think the larger
risk for feed buyers is that prices will go higher.
The second, longer-term level of uncertainty
relates to ethanol demand. As long as oil prices remain above
$60 per barrel and the current government ethanol processing subsidies
continue, ethanol production will likely continue to expand. Next
year’s corn acreage may have to expand again to meet ethanol
demand. Last fall’s price increase may be repeated in 2007
if ethanol production expands again.
Those who must buy feedstock should consider
pricing feed now to cover the next few months to reduce the risk
of much higher prices. What if prices drop after pricing feed
ahead? That scenario can be frustrating, but there are a couple
of alternative methods to consider. One method is to simply price
some, but not all of your expected feed needs. Another method
that can be used after pricing feed ahead, is to buy corn put
options that will increase in value if prices fall. For example,
a September $3.40 put option currently would cost about $660 plus
interest. The option would cover 5,000 bushels of corn.
I think the same methodology applies this
fall. Beginning in September, consider pricing feed for winter
needs, especially if prices sag prior to corn harvest. I think
any price below $3.25 would be an opportunity to buy ahead this
fall, especially if oil prices continue at or move above current
prices.
Read Delton's Weekly
Crop Comments
Read Delton's Monthy
Grain Outlook Comments
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