| February 12, 2010 | Archived Issues |
2010 Market Plans
It looks like 2010 will be another challenging year for making marketing decisions. New crop corn and soybean futures prices are well off their early January highs. December 2010 corn futures prices slipped more than sixty-cents and November soybean prices fell about $1.60 from the highs before recovering somewhat in recent trading. July 2010 Wheat futures prices are below what is likely needed to recover total costs of production.
Expected old crop (2009-10) corn carryover of more than 1.7 billion bushels is considered to be more than adequate. Soybean ending stocks of 210 million bushels are below average, but world ending stocks are expected to swell with record production in South America. The USDA currently expects 2010 corn planted acreage to increase 2.5 million acres from last year to 89 million acres. The USDA’s early projection for soybean acreage is down 500 thousand acres from last year at 77 million acres. Winter wheat acreage is down, but the USDA expects increased spring wheat plantings and total wheat acreage approaching 54 million acres. These USDA acreage projections are not out-of-line with other analysts’ expectations. Assuming these acreages, market analysts will be using trend line yields to estimate production (almost 161 bpa for corn, soybeans nearly 43 bpa and about 43 bpa wheat). These assumptions would result in another record corn crop and large soybean production in 2010.
At this point demand changes are difficult to project as well. Corn demand is expected to be strong. Most analysts agree that ethanol use of corn will increase. But, reduced livestock numbers may pressure feed use and, with large world wheat feed supplies, corn export increases may be hard to come by. Soybean crush and export demand also remains strong, but increased South American competition may limit soybean exports.
Other factors such as weather, economic recovery, currency values, energy prices, speculative fund trading and political decisions are sure to continue impacting the markets. These add to market uncertainty and price risk.
Most early forecasts of 2010-11 average farm price projection ranges are from $3.60 to $3.90 for corn, soybean prices at $8.60 to $9.00 and wheat from $4.50 to $5.00. However, uncertainly suggests prices could vary significantly from these levels. Some analysts have made corn price projections as low as $2.75 and others have highs above $4.00. Some soybean farm price estimated ranges dip to $7.75 or lower on the bottom of the price range. Although these projections suggest upside price potential for planning marketing price objectives, others indicate significant downside price risk must be considered.
Basis variability significantly impacts cash Prices. Depending upon location, Missouri basis changes of twenty to forty cents per bushel for corn have occurred in recent months with changes of forty to eighty cents occurring in the last two years. Forty-cent per bushel ranges in soybean basis have been common with some locations seeing variability of as much as eighty cents. Changes in wheat basis of more than one dollar per bushels have been common in the last years. Volatility in the futures market and wide variations in basis results in the need to consider a variety of marketing tools in order to capture favorable futures prices and merchandize the cash grain in the months ahead.
What does it take to breakeven or make a profit? This is not an exact process because the growing season conditions and actual production are unknown. But estimating breakeven price levels is one of the first steps in market planning. Breakeven prices vary considerably from farm-to-farm depending upon expected yields and production costs. Whether land is owned, share leased or cash rented also has significant cash flow and cost breakeven impacts. FAPRI crop budgets that estimate Missouri crop costs per acre and per bushel are available at: http://www.fapri.missouri.edu/. These budgets project total production cost breakeven prices at; $3.02 per bushel for corn, soybeans at $6.42 and $5.17 for wheat. However, using cost projections based on farm records or using the budget generator, also found at the FAPRI website, should provide a more accurate estimate for individual farms. These enable adjustments for variations in costs and landownership that significantly impact cash flow and prices needed to breakeven or generate profits.
Although well off of the January highs, December 2010 corn futures prices are at more than $3.90 and November soybeans are near $9.30. Even with a weak harvest time basis, these prices should still offer profitable production returns. July 2010 wheat futures prices near $5.20, assuming continued weak basis, does not cover all production costs, but would more than cover operating costs in most situations. While the current markets result in a disappointing price situation, they still provide profitable corn and soybean returns in volatile markets that appear to offer both upside potential and significant downside risk. These confusing and uncertain market signals make market planning difficult.
What are reasonable market pricing objectives? Setting price goals for making sales is never easy, but some guidelines may help. In most cases it is a good idea to have two market price objectives. An upside market goal or target for sales if prices move higher. The second is a downside price goal or trap price to trigger sales if prices move lower. The upside price goal should be a reasonable price objective that captures profitable prices. The price trap is in place to protect or “trap” a minimum profit or breakeven price should lower prices lead to a continued market downtrend. Currently, a move to the early January highs seems optimistic. But one objective would be to at least capture prices that would be at or above some of the 2010-11 average farm price forecasts. For downside traps, recognize that prices below the early February lows would send a negative price signal that the downtrend is continuing.
When should sales be planned? Historic seasonal price trends suggest that, in most years, corn and soybean prices offered during the next two to five months are usually higher than the prices offered at harvest time. Pre-harvest time market highs tend to occur before or during planting time and again in late June or early July. In recent years several of June-July prices exceeded the spring highs, but not always. However, once a spring or summer high is posted, prices usually trend lower into harvest. Making sales at profitable prices or spreading sales during the next few months is likely to be a sound marketing strategy.
How much to sell? There are many things to consider before deciding on this. Previous sales, the ability to bear risk of lower prices and cash flow needs are major considerations. If some land is cash rented, especially if it is at relatively high cash rent, then protecting profits and cash flow on this may be a priority for beginning to make sales. Production risks and the ability to meet delivery requirements on cash contracts must be also considered. The lowest amount of production in recent years might be a starting point here. Revenue based crop insurance also provides risk protection for delivery requirements up to the insured level. The amount of grain storage available and how much grain is expected to be delivered at harvest time is another major consideration in how much to sell. Spreading sales is another important way to reduce risk, especially in uncertain markets. This is usually accomplished by making sales of predetermined quantities as price targets are met and increasing sales of additional quantities as prices move to higher price goals or down to pre-determined price traps.
Marketing can be intimidating and risk cannot be completely avoided. But market planning and the discipline to follow through on the plan usually produce acceptable results. Writing it down and having a written plan can enhance the ability to follow through with objectives. Information on simplified written market plans may also be found at: http://www.fapri.missouri.edu/. Plans should include the willingness to use a variety of market tools to capture price and merchandise cash grain. Plans should also be flexible and occasionally reviewed to insure that marketing objectives are being met as market outlook changes. There are no guarantees, but selling upside price objectives, protecting downside price risk and spreading sales over the next two to five months puts the odds of successful pre-harvest marketing on your side.