I just read a SWFP article that said, “Maybe a silver lining lurks behind the dark cloud of declining grain prices—the bumper crops on the way to bins now may pressure prices downward, but they also could add stability to what has been a volatile market.” (“Bumper grain stocks bring supplies back to average levels,” Oct 20, SWFP). I don’t know about you, but I would rather have $8 wheat with 80-cent price moves than $5 wheat with 50-cent price moves.
Thirty cents per bushel (80-cent versus 50-cent price moves) is $12 per acre with 40 bushel wheat. Or 80 cents per bushel is $32 per acre (40 x 80 cents) and 50 cents per bushel is $20 per acre (40 x 50 cents). If the price move is down, of course you would rather have the $20 loss per acre than the $32 loss. But if the starting point is $320 ($8 x 40) compared to $200 ($5 x 40), it’s a no brainer, give me the price volatility and the higher price.
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Besides, the 80 or 50-cent price move can be up as often as it is down. Prices received (selling at the relatively high price compared to selling at the relatively low price) tend to average out. Research by Dr. Wade Brorsen, Oklahoma State University, shows that wheat producers tend to sell more often when selling on upward price moves than selling on downward price moves.
You may not have noticed but the price volatility used in the example above was the same – 10 percent. Eighty cents is 10 percent of $8 and 50 cents is 10 percent of $5. Even if the $5 wheat price variability was 5 percent (25 cents), most producers would rather sell at $7.20 ($8 - $0.80) compared to $4.75 ($5 - $0.25).
The moral of this story is that the key to profit or loss is not price volatility or the lack of volatility. The key is having product to sell with the cost of production below the price times quantity produced.
An observation is that most producers prefer a relatively low price with product to sell rather than a relatively high price with no or little product to sell (crop insurance aside). During the last eight years (2007 – 2014) in Oklahoma, yields have been below average three times and above average four times (one year was average).
Every time yield was below average, gross revenue was below average. Three of the four times yields were above average, gross revenue was above average. In 2010, the yield was 10 percent above average, and gross revenue was 14 percent below average.
A deceiving aspect of numbers is percentage increase versus percentage decrease. If the wheat price declines from $8 to $5, that is a 37.5 percent decline in prices (8 minus 5 divided by 8). An increase from $5 to $8 is a 60 percent increase in prices (5 minus 3 divided by 5).
Care must be taken to understand what the numbers are telling you. But, the number that counts is the amount that stays in your bank account. That number is a combination of yield, price, and costs. Each has its own volatility.
The bottom line is that when it comes to profit (money staying in the bank), costs are more important than yield or price, and yield is more important than price.
If you ask an economist what is 2 + 2, they are likely to say, “What do you want it to be?” Numbers may not lie but you sure better know what they mean to you.