One "rule of thumb" or adage that analysts often use in relation to USDA production reports is: "Large crops get bigger and short crops get smaller." This tends to occur because when USDA projects high yields and growing conditions remain favorable, subsequent crop production estimates usually are higher and the big crop tends to get bigger. The opposite often occurs when USDA yield estimates fall below trend lines, growing conditions may continue to deteriorate and the short crop production estimates continue to shrink in later production reports. USDA's August 12 crop production estimates came in well under trade expectations. Unfavorable growing conditions are resulting in lower yields and production. Will this year's short crop get smaller? USDA's August report based on survey data, surprised many observers. Corn yield at 125.2 bushels per acre was more than ten bushels lower than the adjusted trend yield of 135.8 in the July Supply and Demand estimate. Soybean yield estimates were lowered from 39.7 bpa to 36.5 bpa. Late pollination of corn in the eastern corn-belt and soybean plants' ability to respond to improved August weather still offered some hope for yield improvement at the time of the report's survey. However, with the exception of a few "garden spots," August rainfall continues to be spotty and disappointing. It appears that the possibility of a short crop getting smaller could occur. USDA projects both domestic and world supplies of grain to tighten considerably. U.S. estimated carry over from the 2002-03 corn crop is 767 million bushels-the lowest since 1995-96. World coarse grain ending stocks are expected to be the tightest in twenty years. U.S. soybean projected 2002-03 ending stocks of 155 million bushels are the lowest since 1996-97. Wheat carryover supplies were lowered to 467 million bushels. Tighter supplies should result in higher prices. USDA increased average 2002-03 corn price by fifty cents from $2.00 (July Supply & Demand Report) to $2.50. Average new crop soybean price was increased $1.00 from $4.50 to $5.50 and wheat average price from $3.05 to $3.50. Short crops and tighter supplies produce a much different marketing situation than in recent years. Since 1998, large supplies and low prices rewarded marketing strategies that avoided harvest time price lows and maximized LDPs, while collecting market loss payments and capturing limited storage returns. Prices are now expected to be above loan rate, so there will be no LDP. In the days following USDA's August report, new crop futures reached levels, that if maintained, would be above price levels that trigger Counter Cyclical Payments (CCP) under the new farm law. In a short crop situation it also is important to remember another market "rule-of-thumb;" short crop prices tend to peak early-often before or at harvest time! Higher prices, no LDP, possibly no CCP and price peaks before or during harvest all suggest that marketing strategies of recent years will not work this year! Will the short crop get shorter and how high will prices go? No one really knows, but many will speculate. Corn, soybean and wheat prices already have reached levels that provide the best pricing opportunities in more than four years! If crop conditions continue to deteriorate, the short crop may get smaller and prices may move significantly higher. However, before anticipating a return to high soybean prices and record corn prices of 1996, it is important to recognize the supply and demand situation is somewhat different. While world coarse grain supplies are the tightest in about 20 years, the markets perceived tighter supplies in 1996 because China imported corn and their domestic supplies were underestimated greatly, now China is expected to provide export competition. Hog prices were higher, allowing profits even with higher feed prices, and the market had to ration grain to meet demand needs. This year livestock producers are facing losses and current tight carryover projections still include strong use, suggesting less need to ration supplies. In addition, South America will respond to higher prices and produce a soybean crop that may be larger than the U.S. crop--meeting any market needs by spring. For now, marketing strategies should anticipate typical short crop price patterns. This can be difficult, especially when production is uncertain and there may be less to sell due to reduced yields. Uncertainty and unpredictable weather will likely keep prices volatile. If the growing conditions don't improve soon or if production expectations continue to decline, prices could be expected to move significantly higher-especially if it becomes necessary for the market to ration supplies. Tight supply means that the 2003 crop needs to be good. Uncertainty will continue into next year, supporting prices and reducing the likelihood of government program CCPs. However, since back-to-back short crops almost never occur nationwide, it might be wise to expect the typical pattern of an early price peak followed by a period of considerable price risk and slowly declining prices. It could be a situation in which the best sales opportunities occur at or before harvest time. This means that new crop market strategies should expect no LDP, possibly a reduced or no CCP and greater risk in storing while attempting to capture short crop sales opportunities.
Should you plan to store new crop (2002-03) corn and soybeans at harvest time? While most agree that avoiding harvest time price lows and capturing higher prices are the primary reasons for storage, a variety of factors also may influence the use of on-farm storage (convenient unloading, need to dry grain, elevator waits or shut-downs, etc.). However, from a pricing standpoint, the decision to store grain should consider what the market offers for storage-especially if you are considering use of commercial storage. Basis and market carry represent market signals for storage decision-making (see: Decisive Marketing, September 2001, Market Signals for New Crop Storage Decisions). Soybeans: Current new crop cash bids suggest that basis for most Missouri locations will be similar or slightly stronger than recent years. Assuming basis recovery follows a pattern similar to recent years, suggests basis gains of eight to ten cents per bushel into January 2003. Thursday (August 15, 2002), the January '03 soybean futures contract ($5.72 ¾) was discounted ¼ cent under the November '02 contract $5.73). The March '03 contract was discounted 2 ¼ cents ($5.70 ¾). There is no carry. This is an " inverted market," which means the futures market is discouraging storage by offering negative returns! The total potential gross return for storing soybeans into January only is about $0.8-$0.10 per bushel (basis gain plus [no] carry). Assuming storage charges of $0.03 per bushel per month and an operating loan interest rate of 7%, commercial storage costs of soybeans based on Thursday's new crop bids (about $5.44 Central MO) amounts to about $0.19 per bushel. The market currently is offering a net loss of $0.09-$0.11 per bushel for this example of commercial storage of soybeans! Corn: Market signals for storing corn aren't much better. Current new crop cash bids suggest similar (or slightly less) basis gain potentials as in recent years-about $0.10 by February 2003. Carry, offered by the March 2003 corn futures contract ($2.88 ¾) over the December 2002 contract ($2.84), is just under $0.05 per bushel. The potential gross return, for storing corn until February, would be about $0.15 per bushel (basis gain plus carry). Using the previous commercial storage charges and interest rates, storage cost based on new crop bids (about $2.55 Central MO) would be $0.18 per bushel. Current markets are offering a potential loss of $0.03 for storing corn until February '03! Since basis (assuming a typical basis pattern) and market carry are signaling no return to storage, higher cash prices and storage returns must come from higher prices in the futures market. This means that price risks essentially are the same whether you store grain or buy futures. Higher January soybean or March corn futures prices should produce profits and lower futures prices should incur losses. If you store grain in this situation-you're speculating in futures! Instead of storing grain at harvest (especially soybeans in an inverted market), you may want to consider cash sales and re-owning with futures if you anticipate higher prices. While most farmers dislike the idea of margin calls on a futures position, the losses from lower prices essentially would be the same-a cash loss on a futures position or an inventory cash value loss on stored grain. In addition, there are advantages to selling the cash grain and taking a futures position. You generate cash to pay off operating debt (reducing interest costs) and meet other cash needs (including margins for futures positions), along with avoiding risks and handling losses associated with grain storage. The only economic advantage to storing cash grain would be to manage "cash basis" income taxes: however, there may be better ways to accomplish this (prepaid expenses, Section 179 deductions, etc.). The markets have been volatile and production prospects remain uncertain. Basis and/or market carry may change in the weeks prior to harvest; so watch these market signals closely. Currently the markets seem to be saying, "Forget storing, if you want to speculate-buy futures!" |