Lack of Good News

Two USDA reports, the March Planting Intentions Report and the April Supply and Demand Report, offered little "good news" for grain markets.

Intended corn planting acreage is up 4% -- more than 79 million acres compared to 75.8 million acres last year. This was more than most analysts expected and many continue to expect that the actual planted acreage will be less, as has often been the case in the past. Wet weather in southern production areas along with the lack of progress on the farm bill may already be contributing to fewer corn acres. However, even if the final number of planted acres is less than the intentions report, planted acres will likely still be up considerably from last year. With average or better yields, increased acreage is negative to corn prices.

The soybean planting intentions were less than many expected, down 2% from a year ago at slightly less than 73 million acres compared to 74 million acres in 2001. However, while many analysts expect actual corn acreage will be lower, most expect actual planted soybean acreage will be somewhat higher than intentions. Slow progress on the farm bill, which might reduce loan rates, along with any planting delays and acreage shifts from other crops could result in more soybean acres. With the large South American crop beginning to pressure price, any reduction in soybean acreage may not have much price impact unless U.S. weather and production concerns arise.

Supply and Demand changes were small in the April USDA report, but changes were negative for prices! Somewhat lower feed use and continued disappointing exports caused USDA to increase estimated corn ending stocks by another 25 million bushels to 1.621 billion bushels. This is lower than the 2000 crop ending stocks, but the direction of the 2001 ending stocks estimate continues to be up instead of down. Increases in projected corn ending stocks, even if it is still below the previous year, is negative to price and USDA lowered the average 2001 crop price estimate by five cents to $1.90.

The soybean supply and demand balance was left unchanged. The bad news here was that many analysts expected a small increase in soybean use and a further tightening of carryover supply-which didn't happen!

It would appear that supply and demand news should be good for wheat (1% reduction in planted acreage, somewhat tighter world supplies and poor crop conditions in hard red winter wheat growing areas). However, USDA lowered feed use and exports somewhat, resulting in an increase in ending stocks of 32 million bushels over the March report. The wheat market apparently ignores any positive wheat price news and focuses on the negative, resulting in continued weak prices.

Low Prices, Loan Rates and Weather

History suggests the best time to make pre-harvest sales is mid-April to early May for corn and about mid-May for soybeans-planting times for both crops. The historical seasonal price pattern, for both crops, has been for prices to rally from fall/winter lows into springtime highs during this period. At this point, usually only poor growing weather keeps prices from beginning a price decline into the fall harvest season. This suggests that some of the best pricing opportunities for new-crop corn and soybeans should occur within the next month. In fact some market analysts are beginning to recommend making a portion of new crop sales during this period.

The problem is that new crop corn and soybean prices are not following past seasonal patterns. Corn prices have been declining for more than six months with December (new crop) corn futures trading below $2.20 in mid-April. Soybean prices did rally somewhat from fall/winter lows before slipping back into the winter trading range. A small soybean price rally has occurred again during the past week, but November (new crop) soybean futures prices are trading at less than $4.70. New crop cash bids of $1.85 for corn and soybeans at $4.30, or less, have been common at many Missouri elevators. While prices may go lower, these are certainly not attractive prices or ones that most would consider a "profit opportunity!"

The government program commodity marketing loan programs offer some price protection. However, farm bill discussions create some uncertainty in the level of price protection the loan or LDP (loan deficiency payment) may provide. Current law maximum national loan rates are $1.89 corn and $5.26 soybeans. In recent years, annual loan rates have been at these levels. However, there have been rumors that the administration might exercise its authority to lower soybean loan rates somewhat. In addition, the House and Senate farm bills offer differences in loan rates. The House proposes leaving corn at $1.89 and lowering soybeans to $4.92. The Senate version increases corn loan rates to $2.08 and lowers soybeans only slightly to $5.20. Most observers expect final House-Senate negotiations to result in a compromise somewhere in between the two versions. Recent compromises, offered by each side during the week, range from $1.95 to $2.02 for corn and $4.98 to $5.04 for soybean loan rates. However, it is still uncertain that a new farm bill will be completed in time for the 2002 crop. If not, the current law will apply and the loan rates will depend upon the Secretary of Agriculture's decision on loan rates.

Whichever loan rates apply, the marketing loan does provide price protection at a level above current new crop futures or cash bids. If cash bids remain below loan prices, then the LDP "makes up the difference" between cash and loan prices. In recent years, some have attempted to "enhance" the price by hedging or forward contracting during the spring highs to "lock-in" a more favorable price than had been occurring at harvest. When prices declined at harvest time, the LDP along with the earlier pre-harvest pricing strategy resulted in a net price greater than the loan price. The major risk in a "price enhancing" strategy occurs if pre-harvest sales are made at prices below loan rate. If prices continue to rise or are higher at harvest than when the pre-harvest sale is made, the net price would be less than loan price because of reduced or no LDP. Most expect continued low prices, however, the odds of a price rally sometime during the year may be improving and may add to the risk of early sales.

Weather could become a major factor in the markets. Corn acreage will be up, but 2001 crop carryover will decline from the previous year. Soybean use remains very strong, carry over supplies will not be as large as was expected earlier and the planting intentions report suggests fewer acres this year. The reduced corn carryover and lower soybean acreage means that weather will be important to insure good growing conditions and yields. Already, there have been some concerns about delayed planting in some southern areas and dryness continues to plague a significant part of the hard red winter wheat area and some of the western Corn Belt. Anything that suggests less than trend line yields could produce volatile and higher prices.

Low prices, loan rates and weather uncertainty create a complex situation for making new crop marketing decisions. Corn and soybean prices are low, but the possibility of even lower harvest prices is very real-especially with average or better crops. The LDP does limit some of the downside risk to a loan price that hopefully will soon be determined or announced. Weather risk will remain for some time and could negatively impact early sales, especially if made at prices below loan rates.

It's hard to argue against April-May sales since historically this period usually offers some of the best pre-harvest prices. However, low prices along with uncertain weather and the need to utilize the government loan program price protection makes it a tough decision this year. Marketing strategies may have to be complex and may contain risks or additional costs that must be carefully considered. Avoiding pre-harvest sales at prices below loan rates limits risk, but may also prevent using the LDP to enhance price to net more than loan rate. If prices could move above loan rates, other lower-risk opportunities might open up. Other strategies such as using put options or minimum price contracts would protect prices while leaving open the potential to capture higher prices and use the LDP. Offsetting hedges or pre-harvest sales with call options would also provide some protection against a weather market. However, using options requires premium costs and these may offset a large part of any gains if price moves are small. The best market strategy for each individual depends upon that person's willingness or ability to assume the risk and in being prepared to recognize and act quickly when, or if, a pricing opportunity arises.