Last Chance Rally or Something Else?

The August 12th USDA Crop Production Reports provided some surprises. While the corn crop is still expected to be a record and the soybean crop is estimated to be the second largest, production estimates for both were less than most expected. The markets responded with sharply higher prices following the report's release which reflects crop conditions as of August 1st. Weather remains dry in many areas and crop conditions have continued to decline. Some market analysts believe conditions will continue to decline and that the price lows "are in." Others discount the report and still expect large crops and lower prices.

Price rallies at this time of year are not unusual. November soybean futures prices (5-year, 7-year, 10-year or 25-year averages) tend to rally an average of about 25-cents from July or August into late September. December corn futures show a similar pattern in recent years (5-year, 7-year and 10-year averages) with a rally of about twelve to fifteen-cents from August to September. Some refer to this price pattern as the "Last Chance Rally"-the last chance to make pre-harvest sales prior to a harvest time price low.

The price reaction, following the August USDA reports, resulted in corn prices about 25-cents higher and soybean prices approximately 40-cents above the July lows. While somewhat above average, these increases correspond with typical "last chance rally" patterns. These price levels also meet "price retracement" goals technical (chart) analysts often look for. Technical analysts expect prices to retrace (rebound) following a decline by about 38%, 50% or 62% of the decline from the previous high to the low. The percentage retracement is difficult to predict, but 50% is most common. The current price rallies from the July price lows for new crop corn and soybeans represent about a 50% retracement of earlier highs.

Do current prices represent the "last chance" rally or are they the beginning of a new move to higher prices? The rally is similar to the typical "last chance" rally and prices meet at least one technical price retracement goal. This suggests the potential to make final pre-harvest sales, at prices somewhat above CCC loan price, and to avoid seasonal harvest time price lows. However, continued dry weather and declining crop conditions along with disappointing results from upcoming national crop tours might support higher price expectations.

This is a marketing situation that requires close attention to market news and price action. If it's a "last chance rally," it may require quick reactions along with a planned selling strategy to capture the "last chance" price prior to a decline to harvest lows. Remember, the August crop report didn't project a short crop-it only estimated crops would not be quite as large as many expected! However, if crop conditions and yields continue to deteriorate, capturing significantly higher prices from a major price rally will be important-especially for those with less production to sell. Last chance rally or something else? The markets may provide the answer in the next few days or weeks.

Market Signals-Sell or Store?

As harvest approaches, the question of whether to sell out-of-the-field or store fall-harvested grain must be decided. Income tax management and avoiding harvest delays enter into the decision. But the primary reason for storing grain is usually the expectation of capturing higher prices, which involves price risk and uncertainty. However, the markets do provide signals that can help make the sell or store decision.

Market carry, the price premium of distant month futures over nearby futures price, represents what the futures market is offering to store or "carry" the grain until the distant month. Recently, March corn futures prices have been 8-cents higher than December contract prices and May corn futures had a 12-cent premium or "carry." January soybean futures offered 4-cent premium above the November contract and March soybean futures offered a 5-cent carry.

Basis, difference between futures price and local cash price, signals whether the cash market is encouraging or discouraging delivery of grain. A wide negative spread between futures and cash prices (weak basis) signals the cash market discourages grain delivery. This often happens during harvest when crops are being delivered out-of-the-field at a rapid pace. Buyers lower cash prices (basis weakens) to discourage grain selling and delivery. The spread typically narrows (basis strengthens) in the months following harvest as grain supplies "dry up" and grain purchasers bid higher cash prices to encourage sales and delivery. A weak basis at harvest time can be a signal to avoid sales and store the grain.

Current new crop cash corn bids suggest a fairly typical harvest time basis at most Missouri locations. This suggests a ten to fifteen cent basis gain potential for storing corn to capture post-harvest basis strength. With a few exceptions, most new crop soybean cash bids represent about average harvest time basis in Missouri-also suggesting a ten to fifteen cent basis gain potential for soybeans.

The corn carry along with average basis gain potential appears to offer the possibility of storage returns for storing corn. However, the small soybean carry plus the average basis gain potential does not appear to be enough to recover cost of storing soybeans in commercial storage. It also appears that on-farm storage of soybeans will be marginal due to the small market carry offered. While other factors will impact the store/sell decision, current market prices appear to be sending the signal: Store corn-sell soybeans!

Counter-Cyclical Payment for 2003 Crops?

If USDA's large crop projections hold up, will there be any counter-cyclical payments (CCP)? The CCP "trigger prices" equals the target price (corn $2.60, soybeans $5.80) minus the direct payment (corn$0.28, soybeans $0.44). This results in trigger prices of $2.32 for corn and $5.36 for soybeans. If the 12-month average price falls below these prices, then the CCP is triggered.

USDA's August supply and demand estimates projected mid average corn price at $2.20 and soybeans at $5.05. This suggests the potential for $0.12 CCP for corn ($2.32 minus $2.20) and $0.31 for soybeans ($5.36 minus $5.05). Note that these are early estimates and prices may change considerably, increasing or eliminating a possible CCP. Wheat prices are currently above the CCP trigger price.