Planning for Harvest Time Sell/Store Decisions

According to the August 12 USDA production reports, record corn production (that some describe as huge) and a large soybean crop (although somewhat smaller than many expected) along with increased grain sorghum production will be harvested this year. This week, a privately sponsored Midwest crop tour appears to be supporting these large crop projections. Large crops often mean lower prices and, since peaking in April, new crop corn and soybean prices have declined in anticipation of large production. Large supplies and lower prices generally encourage use. This increased demand may eventually "drive" prices to higher levels later in the marketing year as supplies are consumed. One market adage says, "Always store a large crop!" Does this saying apply to this year's marketing strategies?

Corn: store a large crop? USDA projects a record average corn yield of 148.9 bpa, well above last year's record 142.2 bpa, and record 10.923 billion bushels total production. It appears that about the only thing standing in the way of this huge production estimate would be an early frost in the northern Corn Belt where crop progress is slow. The large production is expected to contribute to increased 2004-05 ending stocks (1.132 billion bushels) and USDA lowered the estimated price range to $2.05-$2.45.

Not all of USDA's estimates are negative to corn prices. Corn demand is expected to remain strong, totaling 10.72 billion bushels. This is also a "huge" number resulting from increases in feed use and exports along with strong industrial use led by 1.37 billion bushels for ethanol production. In spite of record expectations, production estimates only exceed projected demand by about 200 million bushels-meaning large production will again be needed in 2005! World supplies also remain very tight with a projected decline in world ending stocks. If these projections hold up, the potential is there for a demand driven price rally.

Market carry and basis are beginning to signal potential storage returns. March '05 and May '05 corn futures prices are offering 8 cents and 14 cents premiums over December '04 contract prices (8-19-04). Coupled with the possibility of seasonal basis gains following harvest, these price spreads offer storage returns-especially for on-farm storage.

Current December corn futures prices result in cash prices near the middle of USDA's projected price range. Price strength resulting in a seasonal late summer pre-harvest price rally could produce prices in the upper one-half of the projected price range and an opportunity to add to pre-harvest sales of corn that must be delivered at harvest. However, while some end-of-season growing conditions and upcoming supply/demand reports could change the outlook, the corn market appears to be signaling a potential for storage returns.

Soybeans: will prices recover? While not a record, expected production of 2.877 billion bushels represents the second largest soybean crop ever. However, the trade was expecting a larger estimate, in the range of 2.881-3.042 billion bushels, and soybean yields continue to be disappointing at 39.1 bpa-only the third largest average yield and below the distant 10-year old record of 41.4 bpa.

Soybean use is expected to be relatively high at 2.798 billion bushels with 2004-05 carryover increasing to 190 million bushels. This is not a burdensome carryover and represents a decrease from the earlier USDA estimate of 210 million bushels. However, it is an increase from the current year's ending stocks estimate of 105 million bushels and will only be the fifth lowest carryover in the last 10 years-suggesting adequate soybean supplies. South American production is expected to rebound in 2005 and world ending stocks of soybeans are expected to increase significantly. This increase in world soybean supply projections is in sharp contrast to predictions of shrinking world corn ending stocks and suggests that a "demand driven" soybean price rally could be more difficult to achieve.

Market carry and seasonal basis gain potential may signal possible storage returns. In contrast to last year's inverted soybean market, January '05 and March '05 soybean futures prices are offering 5 cents and 13 cents premiums (8-19-04) over the November futures contract price. This market carry, along with seasonal post-harvest basis strength, may offer potential for short term storage returns. While the market signals a chance for short term storage returns, predicted increases in domestic and world soybean supplies suggests caution in planning for longer term storage strategies.

New crop soybean futures bounced higher following the somewhat less than expected production estimate, suggesting the possibility that pre-harvest price lows were in and the potential for a seasonal pre-harvest price rally. Current new crop prices represent prices in the lower one-half of USDA's projected price range, hinting at the potential for somewhat higher prices. Additionally, most market participants understand that the soybean crop is not made. Cool weather, slow plant development, plant diseases and the possibility of early frost suggest production/yield estimates could slip further in upcoming supply/demand reports. Continued uncertainty about the possibility of lower production could fuel a pre-harvest rally and offer opportunities for additional pre-harvest sales and short-term storage returns. With world supplies expected to increase, longer-term storage returns and price rallies may depend more upon 2005 South American soybean crop potential.

Marketing plans should be adjusted to reflect changing market fundamentals and price expectations resulting from the latest supply/demand estimates. . Late summer or early fall price rallies frequently offer opportunities to complete pricing grain for harvest delivery before prices decline to a harvest low. Market carry and basis provide market signals for harvest time decisions on whether to sell or store cash grain. Currently corn and soybean markets are signaling potential storage returns, but expected increases in world supplies make long term soybean storage risky. Upcoming supply/demand estimates will provide further clues about how the crop finishes and price estimates that can be used to set pricing targets. The old adage to "always store a large crop" may apply, but how well it works can still depend upon world supply/demand and next year's production potential.