Signals to Sell Cash Corn?

USDA's December Supply/Demand Reports projected a 2003-04 corn price range of $2.00 to $2.40, ten-cents higher than the estimates in November. At many Missouri locations, cash corn prices are in or above the upper one-half of this expected price range. This is an opportunity to capture prices near the top of the projected price range, especially if most of 2003 production is in storage and unpriced.

Other market signals also suggest current prices may offer sales opportunities. Basis strength and the lack of market carry signal the markets are encouraging cash corn sales. Basis (futures/cash price difference) is narrower (stronger) than recent year averages, suggesting the cash market is trying to attract cash corn deliveries. Market carry (price premium for deferred month futures contracts) has decreased in recent weeks, a signal that the market wants grain and is no longer willing to offer a price premium that warrants storing (carrying) the corn until the deferred months. Lack of potential for storage returns and strong basis are market signals to make cash sales.

While current market prices are providing sell signals, there are also good arguments for higher prices. World wide coarse grain supplies are low, suggesting potential for increasing corn exports. The expected further slowing of Chinese corn export competition and somewhat lower Argentine production estimates add to bullish arguments for prices to trend seasonally higher into spring. The tight world supply situation with potential for higher prices is in sharp contrast to the record crop and increasing domestic supply situation-creating the market risk of selling to early and watching prices go higher. However, passing up sales opportunities increases the risk of waiting too long and watching favorable prices slip away while storage costs increase.

A variety of marketing strategies can be used to manage these price risks when making corn sales. Spreading sales is one example. This can be accomplished by making sales of a portion of the crop at current prices and then pricing additional amounts if prices move higher. Some marketing services have already recommended sales of 50% to 65% of 2003-04 corn production and are targeting more sales as nearby futures move through $2.50 toward $2.65. Spreading sales in this manner captures higher average prices as the price level increases. This strategy also reduces the risk of lower prices, since a portion of sales have already been made at favorable prices, should prices fail to move higher.

Another market strategy to consider, especially since the relatively strong basis suggests price gains will have to come through higher futures prices, is to sell the cash corn and re-own it with futures contracts. The cash sale captures the relatively strong basis. Storage costs and risks are eliminated and, since the carry is small, most price gains should be captured with higher futures prices. Call options also can be used to re-own the corn. Option premiums (cost of the option) are somewhat more expensive than storage costs for on-farm stored grain, but compare favorably with commercial storage costs.

Soybean Price Risk

Disappointing U.S. soybean production sent prices sharply higher during harvest time. In October prices moved rapidly through the $7 range and peaked above $8. Nothing seemed to be "in-the-way" of $9.00 per bushel or higher prices and, as usual in a strong bull market; some were predicting double digit soybean prices. However, prices failed to move higher and have since traded in a 60-cent price range of about $7.30 to $7.90. Demand continues to be strong in spite of higher prices. USDA has projected soybean exports and crush to decline from last year, but both continue at above year ago levels. Some market analysts argue that current prices have not rationed soybean use and higher prices are necessary to limit use of short supplies.

Uncertainty about demand for short U.S. soybean supplies creates price volatility and significant risk. After several weeks of speculation, a larger than expected soybean sale to china was announced late Thursday (12-18-03). While this is bullish news, questions about details of the sales added to uncertainty in the soybean market. Soybean futures opened sharply higher on Friday morning, and then declined in early trading-demonstrating the volatility in the market.

Another major market price risk is crop growing conditions and Asian rust in South America. Dry weather has reduced Argentine production potential somewhat. While they have now received some rain, weather conditions there will be watched closely. Asian rust is present in Brazilian soybeans, but fungicide spraying and weather conditions appear to be keeping it under control for now.

While there are valid concerns that prices may not have rationed use, time may be running out for higher prices. Even with the short U.S. crop, world soybean supplies are expected to remain large. Record soybean production is expected in South America. Once this South American crop becomes available, U.S. exports are likely to "dry up." The market already anticipates the South American crop with "negative" carry (lower prices) for the May and July soybean futures contracts.

Direction of soybean prices may depend upon the level of exports and crush during the next few weeks. With current rates of use, although world supplies are large, domestic users may have difficulties finding soybean supplies next summer. USDA will update production and grain stocks numbers, along with supply/demand estimates, on January 12, 2004. The market will watch these reports closely to determine whether there will be "enough" U.S. soybeans at current prices.

For those still storing soybeans, this is a high risk market. Like the corn market, relatively strong basis and lack of market carry are providing signals to sell soybeans. If the decision is to continue storing soybeans, it is important to recognize the risks and be prepared to react quickly on changes in market news. New price highs may or may not occur. There are valid arguments that prices must go higher to ration demand and it is certain that the current rate of use must be slowed. However, unless production problems develop in South America, it seems likely that prices will eventually decline.