Old Crop Storage-How Much Longer?

For a variety of reason, in spite of negative storage signals from the markets, producers stored 2002-crop corn and soybean production. A significant amount remains in storage, some of it under CCC loans. What should be done with it now?

At this time, storage of corn has not worked! After peaking last September, corn futures prices declined to a January low. Since then, price gains have been modest and the market may again "test' the January price lows. At same time as futures prices were declining, basis (difference between futures price and cash prices) continued to strengthen (narrow) and offset some of the futures price decline. Recent futures price gains and strong basis has produced cash prices nearly equal to some paid at harvest time; but, due to storage costs, storing corn has not paid!

Continuing to store corn to capture higher prices is risky. Higher corn prices most likely depend upon improved exports and/or continued drought in the Corn Belt. While USDA didn't lower export estimates as much as expected in the February Supply and Demand reports, some analysts believe these estimates could be lowered more next month. This suggests that improved exports would be more of a "surprise" than something to "expect." Drought worries may quickly fade with snow or rainfall, regardless of the amounts. Storing corn to capture higher weather market prices is "betting on the weather!"

Strong basis signals that the cash market has immediate needs and is trying to "bid" corn out of storage. However, futures prices suggest that the corn supply is adequate, price rationing is not needed and the corn will eventually have to come to the market. While storage won't be profitable, this appears to be an opportunity to capture an unusually strong basis with cash sales.

As an alternative to storing grain for higher prices, consider a strategy of selling cash corn and buying July call options. This strategy captures strong cash basis, eliminates downside price risks and allows capturing futures price rallies on improved exports or continued weather problems. If futures prices rally sharply, it is possible that basis could weaken (futures price rise more than cash prices) making call options a better choice for capturing higher prices and call option premiums compare favorably with storage costs. The risk to this strategy would be if cash prices continue to outperform the futures market-possible, but not the most likely scenario.

Soybean storage has worked somewhat better. Soybean futures prices also peaked in September and began to decline. After bottoming in October, March soybean futures prices recovered somewhat. However prices failed to match the September high and have generally traded in a $5.50 to $5.80 range Strong exports contributed to the post-harvest price recovery. Export demand remains strong, even in the face of record South American production, and continues to support prices when many were predicting a decline. Unusually strong basis coupled with the modest price recovery has offered opportunities for some storage returns.

While limited storage returns have been possible, continuing to store may not be the best alternative. Carryover supplies at marketing year-end are estimated to be tight (only 165 million bushel), but South American production will now provide export competition. Dry weather may be a concern, but risky to base storage decisions on. Like corn, selling cash soybeans to capture strong basis and eliminate downside price risk may be a better alternative strategy. Call option premiums are comparable to storage cost, especially commercial storage charges, and purchasing calls would allow capturing higher spring or early summer prices.

Early New Crop Projections

Corn: Selected private and University analyst projections are similar to the USDA baseline estimates of 80-81 million planted acres, trend line yield of about 140 bpa, total supply in excess of 11 billion bushels and use of about 9.8 to 10 billion bushels. These estimates produce corn carryover supplies above one billion bushels.

New crop corn price expectations generally range $1.90 to $2.25 per bushel. At these prices, some CCP (counter cyclical payments) seems likely and the low end of the range could trigger an LDP (loan deficiency payment). As a starting point for sales goals, it appears that new crop cash corn prices at or above $2.25 may offer pricing opportunities. Another market objective would be to avoid prices near or below the low end of the range.

Soybean: Not all analysts agree with USDA's baseline soybean projections for 2003-04. Many expect a somewhat higher planted acreage (72 million acres or more) and more harvested acres (about 71 million acres) compared to USDA's 71.5 planted and 70.2 harvest acreage estimates. There is agreement on trend line yields of about 40 bushels per acre. While use number estimates vary, total use estimates average less than USDA's demand projections. This produces estimated new crop soybean carryover from 230 million to more than 300 million bushels-significantly larger than USDA's baseline carryover estimate of 190 million bushels. Other analysts price estimates are also below USDA's $5.15, averaging about $4.80. These prices suggest CCP and possibly LDP if realized.

Wheat: Nearly everyone agrees that wheat acres and production will increase, leading to increased carryover supplies and lower prices in 2003. USDA's 2003-04 baseline projects $3.25 average price. Other analysts see average prices somewhere between $2.95 and $3.40.

What if the weather stays dry? Some private market analysts prepare alternative bullish and bearish scenarios in their early season supply and demand projections. Poor weather scenarios include corn yield estimates of 128-135 bpa and soybean yields near 36 bpa. Under these conditions, 2003-04 corn carryover could be reduced well under one billion bushels to about 600-700 million bushels and might result in prices ranging $2.80-$3.00. Under the same conditions, new crop soybean carryover would be reduced to 150 million bushels or less and price could rise to $6.00 or more.

What about better than average growing conditions? In this situation, the same analysts assume 144-148 bpa corn yields and up to 44-bpa soybean yields. These assumptions produce corn carryover supplies in excess of 1.5 billion bushels and soybeans ending stocks of 400 million bushels or more. This would have a very negative impact on new crop prices, which they project at $1.95 or less for corn and in the low $4 range for soybean prices.

There is, of course, a lot of uncertainty in these early projections. However, they do provide a foundation for making new crop marketing plans. It appears likely under average or better growing conditions that grain prices will be lower next fall-maybe much lower! This suggests that plans should be made to take advantage of pre-harvest opportunities and avoid selling at what may be harvest time lows. However, the possibility of lingering drought and the potential for reduced production requires plan flexibility in order to capture higher price opportunities.

Marketing flexibility can be accomplished through a variety of marketing strategies, such as: spreading out sales, scale-up strategies, using minimum price contracts for pre-harvest sales, buying put options to protect price floors or replacing cash sales with call options. These strategies allow capturing higher prices while establishing minimum price on at least a portion of expected production. LDP and CCP may also offset some potential revenue loss.