New Year Ahead-More Uncertainty

By mid-December in most years, without dramatic market news, the grain markets typically are quiet and slow-especially through the holidays. The December USDA reports did their part in contributing to this type of market action with only minor changes in supply/demand projections. At this point, most analysts expect the markets to more or less mark time until the New Year. Slow grain movement and relatively strong demand has supported prices, but a number of market factors create uncertainties and may push prices up or down in 2005.

Projected domestic and world ending soybean stocks are very bearish. In spite of strong demand, USDA expects record soybean production of 3.1 billion bushels to increase 2004-05 ending stocks to 460 million bushels. This is almost quadruple the 2003-04 ending stocks and would be the largest domestic soybean carryover since 1985-86. The world supply situation is even more discouraging. USDA expects increased production in South America, causing world ending soybean carryover to swell to record levels. While United States soybean exports are expected to increase, exports have lagged at times. A weaker U.S. dollar should encourage exports, but high ocean freight rates have offset the weaker dollar and South American production will provide competition in a few months. These and other factors suggest a pessimistic outlook for soybean prices.

The "big unknown" is the impact of soybean rust or weather on 2005 production in both South America and the United States. It is very early in what appears to be a good start on the southern hemisphere growing season, but there are already reports of rust in Brazil and Argentina. Although the Brazilians have experience in managing the disease, the impact on their new crop production is yet to be determined. The impact of the discovery of rust in the United States is also difficult to estimate and raises a number of questions. How will it survive the winter? Will it be limited mostly to the south or will it spread throughout the Corn Belt? Will it decrease production? How much does it cost to treat? The list could go on, but the bottom line is that the discovery of soybean rust adds to production and price risk.

While large soybean supplies suggest a negative price outlook, demand and slow cash soybean movement has supported prices. Currently nearby futures contracts, along with relatively strong basis in some areas, are offering prices at or above the expected price range for soybeans. An "inverted" market (nearby futures contract prices higher than prices for distant month futures contracts) signals strong nearby demand. Recently January soybean futures prices have been higher than March soybean futures prices, suggesting steady or lower prices ahead. This inverted market, along with limited "carry' in more distant months' futures prices does not signal returns for storing soybeans.

The nearby soybean price strength may be offering a marketing opportunity that could quickly slip away if demand slows or cash sales pick up in the New Year. Soybean rust, weather or other production problems resulting in higher prices can't be completely ruled out. However, large domestic soybean carryover, expected increases in South American production and huge world soybean supplies suggest that there is considerable downside price risk.

Domestic corn carryover is expected to nearly double in the current marketing year. In spite of projected record demand, record production of 11.74 billion bushels will increase 2004-05 projected ending stocks to more than 1.8 billion bushels. However, unlike soybeans, world corn supplies are not as bearish. World corn ending stocks are expected to rise, but most of the increase is a result of the large U.S. carryover increase. Although there are increases in wheat and other grains, foreign corn supplies remain relatively tight at near year ago levels. This supports projections for increased corn exports, but high ocean freight rates and disappointing export progress are among the reasons USDA lowered export projections slightly in their December estimates. Feed and ethanol use are also expected to increase.

In spite of strong demand expectations, corn prices have continued to struggle. There has been no significant "post harvest price bounce" and current corn futures prices result in cash prices in the mid to lower one-half of the expected price range. Many have held on to expectations that at some point prices would at least move into the upper half of the projected price range. Storage is filled with the record crop, basis at most locations is relatively weak, winter grain movement is still ahead, and the LDP has already been collected on a significant portion of the corn crop. The market knows this. For those storing corn without price protection offered by the LDP, lower prices could result in panic selling and further price weakness. On a more positive note, July futures carry offers a price premium or storage return of about 15 cents over the March contract. Capturing this market carry could produce some storage profits.

The combination of large domestic supplies, relatively tight foreign supplies, and new crop production uncertainties all add up to significant market risk in the coming year. Current acreage projections and trendline yields would produce another large crop. However, following two years of record corn production it would be unusual to see a third year with a new production record. Weather conditions resulting in anything less than trendline yields, along with strong demand, would begin to tighten domestic supplies. Additionally, soybean rust also clouds the picture for corn. Most analysts expect some acreage shift from soybeans to corn in 2005, but how much? A larger than currently expected acreage shift could further increase corn supplies, especially with trendline or better yields.

These conflicting factors make marketing corn difficult. Fall prices have been disappointing, but the large supplies can be expected to limit price rallies. Record demand, 2005 planted acreage, or weather factors could influence prices in the months ahead and the market is signaling potential storage gains in the deferred month futures prices. While it might seem that downside corn price risk is limited, understand that there are no guarantees that distant month premiums will last and speculation on higher prices with stored grain remains risky, especially if the LDP has already been claimed.

Basis, Problem or Opportunity?

Awareness of the importance of basis in marketing grain is growing. Basis reflects cash demand and can vary significantly depending on local demand, storage availability, or transportation conditions. Although not as dramatic as futures prices, where 50 cents or more movements can occur in relatively short period of time, basis gains can add nickels or dimes (sometimes more) to the net cash price received and significantly impact "bottom line" farm profits.

The impact of basis on cash price can be illustrated by recent cash soybean bids across Missouri. Domestic use and export demand has produced nearby futures price strength and higher cash soybean prices along the Mississippi River in eastern and southeast Missouri. These cash bids are well above CCC loan price and exceed the top of USDA's projected 2004-05 soybean price range. However, rail transportation problems, harvest delays, no navigation on the Missouri River, and limited regional crush demand are among the factors that are producing prices that are as much as 50 to 60 cents per bushel lower at many Northwest Missouri locations.

This weak basis is a problem for those producers in northwest Missouri that are stuck with low prices and unable to efficiently move soybeans to the higher price locations. But for those producers who have soybeans stored on the farm, semi-trucks available, and can haul the soybeans to one of the eastern locations, it may represent a significant opportunity. Capturing basis gains of 50 to 60 cents per bushel may offer favorable returns that more than cover transportation costs.

Although not as dramatic as soybean prices, local corn demand at selected locations also offers opportunities to take advantage of a strong basis. These examples illustrate the marketing flexibility of using on-farm storage and may help justify the ownership of an "eighteen wheeler" in order to take advantage of basis opportunities and add to farm marketing returns.