Sell/Store Decisions

USDA’s August supply/demand estimates included 2006 corn production projections that were higher than most analysts expected. Average corn yield is projected to be 152.2 bpa, the second highest average yield ever! This yield leads to a corn production estimate of 10.976 billion bushels, which would be the third largest corn crop in history and was near the upper end of the pre-report range of trade expectations. It appears that the trade “believes” the estimates, along with the market adage that “large crops tend to get larger,” and many analysts are now anticipating that the September USDA corn production estimate will be higher. New crop (December ’06) corn futures prices declined nearly 20 cents during the past week in response to the corn supply/demand estimates and improving weather conditions in many areas of the western Corn Belt.

USDA’s 2006 soybean production estimate appeared somewhat bullish with an average yield of 39.6 bpa and total production near the low end of pre-report trade expectations at 2.928 billion bushels. However, in contrast to corn, it appears that many did not “believe” the soybean estimates. Everyone knows that August weather is critical to soybean production and improving weather conditions is expected to “add bushels” to USDA’s September projections. In spite of lower USDA August production estimates and the possibility of trimming large soybean carryovers somewhat, soybean prices have slipped lower since the reports.

Missouri’s average corn yield is estimated at 136 bpa, compared with last year’s 110 bpa average, and soybean yields are expected to equal 2005’s 37 bpa. These yields may seem optimistic to producers in many areas of the state where crops have been parched by drought and high temperatures. However, regardless of production expectations in dry areas, crop prospects nationwide appear to be improving and downside price reactions can be expected to occur. With these factors in mind and as harvest approaches, marketing decisions need to focus on whether to sell or store unpriced new crop corn or soybeans.

Basis is weak. New crop corn cash bids in many areas of the state are 40 cents or more under the December ’06 futures price. Bids in northwest Missouri are as much as 60 cents under. Along the Mississippi River and in southeast Missouri bids are somewhat better, but much weaker than average with new crop bids in some locations more than 20 cents under the December futures price.

Soybean basis also is wide (or weak). Very few Missouri locations have new crop soybean cash bids that are stronger than 30 cents under November ‘06 soybean futures price and many locations are reporting new crop cash bids that are more than 50 cents under. Northern Missouri locations with bids of 70 to 75 cents under are common and bids in southwest Missouri may be even lower.

Weak new crop basis represents a market signal to avoid making cash sales. The low cash bids suggest weak nearby cash demand, large old crop carryovers, higher transportation costs, competition for storage space, higher interest rates, and other factors that include anticipation of a glut of harvest time deliveries. Weak basis reflects the added handling costs and the squeeze on grain facilities, along with attempting to discourage grain deliveries. Once harvest is past, basis typically strengthens (or narrows), causing cash prices to improve as users begin to need additional new crop supplies. Although it is difficult to predict how much prices will recover, with anticipated strong 2006-07 corn and soybean demand it seems likely that basis recovery could contribute to storage returns.

Distant month futures contracts offer carry. March ’07 corn futures prices offer a premium (or carry) of about 15 cents above the December ’06 futures prices and May ’07 futures offer carry of nearly 24 cents. These price premiums are what the futures market is currently offering to carry or store the corn and delay delivery until the distant month. This carry in the corn market nearly covers all storage costs for on-farm storage and almost recovers commercial storage costs. The combination of market carry and the potential for basis recovery suggests potential storage gains for storing corn at harvest time.

Distant month soybean futures contract prices offer carries of about 13 cents for the January ’07 contracts, 23 cents for March, and 31 cents for May over November ’06 futures prices. While the carry in the soybean market will not recover all storage costs, the carries will contribute to the potential for storage gains. Basis gains of 10 cents or more would be needed, in addition to the carries, to fully recover soybean storage costs.

Remember, if the carry is not locked-in, storing unpriced grain is speculating on the carry remaining in the market as well as speculation on higher prices. Although strong 2006-07 corn and soybean demand is expected, the USDA production estimates will leave ending stocks at more than adequate levels for both crops. This suggests that there is additional downside price risk, especially if production prospects continue to improve, and this needs to be considered in storage decision making.

Will there be an LDP? New crop corn bids at several Missouri locations are very near loan price levels and additional price weakness could result in corn LDPs. Soybean bids also are rapidly approaching loan price levels at a number of locations. Declining prices in combination with weak basis would suggest maintaining beneficial interest (ownership) of the grain until harvest time lows are in place in order to capture possible LDPs, which may require storage to accomplish.

Sell or store at harvest? New crop corn futures prices have slipped nearly 30 cents from their July highs and soybean prices have declined by about 75 cents. Hopefully earlier preharvest sales have covered amounts of corn or soybeans that must be delivered at harvest. If additional sales need to be made, watch for any September price rallies (often called last chance rallies) to make any additional sales. Beyond that, as harvest approaches, the markets seem to be signaling to store corn and soybeans instead of selling them out of the field.