| August 17, 2007 | Archived Issues |
Harvest, Sell or Store Decisions
Corn harvest is just beginning in southeast Missouri and harvest activity will spread across the state during the next few weeks. Soybean harvest is probably a month or more away. As harvest time approaches or begins, it is time to evaluate market signals and make decisions on whether to sell off the combine or store the grain.
The USDA's August production estimates forecast a record corn crop of 13.054 billion bushels. In spite of increasing ethanol production and prospects for continued strong corn exports due to tightening world supplies, December corn futures have declined more than eighty cents per bushel in anticipation of the large corn production and increasing carryover supplies. Although prices have declined signifi cantly, December 2007 corn futures prices are still at levels seldom seen at harvest time. December corn prices of more than $3.30 at harvest time have occurred only one time in more than twenty years. That was in 1996 as prices were declining from record highs.
Futures market carry (the price premium for distant month futures contracts or storage returns offered by the futures market) is one of the market signals to consider when making sell or store decisions. March 2008 corn futures prices offer approximately 15 cents premium over the December 2007 futures price. The December/May futures market carry is approximately 25 cents. This does not represent "full carry" (a price premium or carry that would cover all storage costs). Storing corn until January through March 2008 would result in storage costs of approximately 21 to 27 cents per bushel, depending upon time of sales and whether corn is stored in on-farm bins or in commercial storage. Storing until May would increase costs to 35 cents or more per bushel.
Basis, the cash market signal to encourage or discourage delivery of grain, can only be described as very weak. New crop cash corn bids in central and northwest Missouri range from 40 to 60 cents or more under the December futures price. Expectations of record corn production, harvest delivery pressure and an anticipated storage crunch with piles of corn stored outside create the need to discourage cash sales and result in the wide negative corn basis. However, the weak basis also suggests the potential for signifi cant basis recovery once harvest is past and expected record demand begins to bid for grain in storage. Although basis is weak, suggesting avoiding sales, new crop bids at most locations still result in prices that are within USDA's projected price range ($2.80 to $3.40) and are historically good harvest time prices. Corn prices really can't be called bad, but the potential for basis gains coupled with the futures market carry are signals to consider storing corn.
The USDA's August 2007 soybean production estimate of 2.625 billion bushels is expected to be exceeded by projected domestic and export use of 2.985 billion bushels. This results in a sharp drop in projected ending stocks from 575 million bushels (2006-07) to 220 million bushels (2007-08). Prices are expected to range from $7.25 to $8.25.
Soybean prices "took a hit" on Thursday, August 16, 2007, when November 2007 futures (new crop) prices closed 40 cents lower. Improved moisture conditions and fund liquidation contributed to the decline. This action fl ashed several negative technical market signals (broken uptrend, broken support levels, etc.). This price action could set the stage for even lower technical futures price objectives in the coming weeks.
The soybean futures market does offer some carry. The January 2008 futures price offers a premium of about 16 cents per bushel over the November 2007 futures price. The November 2007/March 2008 carry is about 27 cents. Costs for storing until January would range from 27 to 39 cents per bushel, depending upon whether the soybeans were stored on-farm or in commercial storage. February/March storage costs would increase to 36 to 52 cents per bushel. Market carry alone does not offer storage returns. Soybean basis is terrible! New crop bids over much of the state are 80 cents to more than one dollar under the November futures price. The weak basis results in new crop soybean bids at or below the bottom of USDA's projected price range following Thursday's futures price decline. If USDA's production/ use estimates are accurate and ending stocks decline as projected, this suggests basis could improve significantly as users bid for tightening supplies in 2008. The potential for basis recovery, coupled with the limited market carry, appears to signal the potential for earning returns by storing soybeans.
Use Put Options for 2008 Wheat Sales?
Old crop (2007) wheat futures prices have rallied to the $7.00 range recently on worries of tight world wheat supplies. While not as high as the old crop futures prices, new crop July 2008 wheat futures prices have also increased. Both the Chicago Board of Trade (CBOT) soft red winter (SRW) wheat futures prices and the Kansas City Board of Trade (KCBT) hard red winter (HRW) wheat futures prices have moved into the upper $5.00 price range. These prices are offering opportunities to sell 2008 production at prices seldom offered at harvest time.
These July 2008 futures prices are also offering the opportunity to use a put option to set a futures price floor near $5.00. Thursday, August 16, 2007, CBOT closing price was $5.75 ½ for the July 2008 wheat contract. A $5.70 strike price July put option with a premium (cost) of $0.52 protects a net futures price of more than $5.15. That's the $5.70 strike price minus $0.52 premium, minus brokers' fees. A $5.30 July premium of just over $0.30 protects a net futures price near $5.00. KCBT options offer similar prices for producers in western Missouri where SRW wheat is priced off of HRW wheat futures.
Although these options require a significant cash outlay in order to cover the premiums, they provide the opportunity for low risk price protection. There is no delivery obligation, no futures market margins to cover if prices move higher and, if prices do move higher, the wheat could still be sold at higher prices. Other than the risk of losing the option premium, this appears to be a low risk opportunity to protect a favorable futures price for 2008 wheat production.