What are the markets going to do? If you ask that question, expect to hear, “They will either go up or down or stay the same.” Since that is not the answer you want to hear, instead ask the question, “What are the markets indicating, and how should that be used along with market outlook information?” That question is more appropriate and will probably get you a valid answer that is more useful. So let’s ask that question and see what the answer is.
Many marketing decisions at harvest are rooted in the need for storage, and whether the potential price later in 2010 will pay storage costs. Marketing Specialist Melvin Brees at the University of Missouri writes in his latest Decisive Marketing newsletter that USDA’s September Crop Report forecast large corn and soybean supplies, which were bigger than the August forecast and may even be larger next month. But he says the late maturing crop could be in jeopardy with frost or freeze damage. Despite the large size of the crops, Brees says there will be a large demand for the crop, and corn carryout a year from now may even be less than it was this year. Additionally, the 110 million bushel soybean carryout from the old crop may only expand to 220 million bushels with the new crop because of consumption.
Brees suggests that good marketers take a long look at whether the demand estimates will hold, because livestock producers will be unable to hold steady or expand as USDA suggests if the ethanol industry is expanding at the same time. Additionally, he wonders if there will really be an increase in corn exports while global wheat supplies are large and wheat feeding could increase. Also, he wonders if US soybean exports will be as strong as USDA suggests with the expected expansion of South American soybean production.
Price ranges projected by USDA are $3.05 to $3.65 for corn and $8.10 to $10.10 for soybeans, and Brees says supply, use, and price projections suggest they would follow a normal pattern of a lower trend into harvest following by a post harvest price recovery. Since the September USDA Crop Report December corn has had a 38 cent trading range and November beans have traded in a nearly 90 cent range fostered by threats of frost to immature crops. Such uncertainty, says Brees, creates difficulty in making store or sell marketing decisions. Consequently, he says look for clues to guide your decision.
Corn. There is a storage premium being offered by the corn market based on March futures being 13 cents higher than December futures, and May futures providing an additional 9 cents. Also cash bids suggest that seasonal basis gains could add another 10 to 20 cents per bushel if stored. Brees says the market is telling farmers to store corn, but do not store it unpriced. He says, “When the futures market offers carry it is also a weaker demand signal. Corn supplies appear to be more than adequate to meet demand. Buyers are content to not acquire corn for future needs by bidding up nearby contracts to acquire inventories. They are willing to let someone else own and store the corn. Slower than expected demand or higher production could result in increasing carryover and disappointing prices, which would limit or eliminate storage returns.”
Soybeans. There is not a storage premium being offered by the soybean market. Brees says there is only a 3 cent advantage to selling January beans instead of November beans and it will cost more than that to store them. Additionally, March soybean futures were even lower than January prices, which is certainly a sell signal, not a store signal. Currently, the harvest basis for soybeans is stronger than normal, which means it will likely not improve to provide any basis gains. Subsequently, the strong basis and lack of carry discourage storage and encourage sales. Apparently, the market sees strong supplies coming from South America next spring and does not want to bid up those prices in the wake of strong competition.
Strategy. The market is saying store corn and sell beans. Compare your cash prices with the USDA estimated price range of $3.05 to $3.65 for corn and $8.10 to $10.10 for beans. Also compare the current prices and the price range with your cost of production, and since current prices may not offer a profit, the prospects for higher prices for corn may move you out of the red and into the black. Those gains may also help with the decision to market soybeans at lower prices than you would prefer, but they may already be offering a profit.
Risks. There is a risk that weather and diseased crops could diminish the supply of corn and soybeans, which would push prices higher, and offer opportunities to lock in higher prices. Also the outside markets such as energy, currency, and the general economy could move prices up or down from current levels. Storing corn unpriced is a speculative action that could result in the loss of the premiums being offered by the futures and cash markets. Storing soybeans unpriced is also a speculative action that may diminish current profits, or could increase them if South American crops fail. Brees says speculating on higher prices can also be accomplished with futures or options positions, rather than risking your cash commodity in the bin.
Marketing decisions are never easy, but looking at what the markets are indicating can help make the necessary decisions. The corn market currently is offering a gain from both the futures and the basis by storing. The soybean market is not offering any significant gain from futures or basis, and suggesting beans should be sold. Marketers should compare prices they are offered with USDA’s estimated price ranges to see if there are profit opportunities. Grain that is stored unpriced has a risk of losing that premium, but if the marketer is confident of higher markets, then that advantage can be captured with a futures or options position.
Source: Stu Ellis, University of Illinois