Bullish Market Surprises

USDA's January 11 Supply and Demand Reports provided some bullish surprises. While 2001 corn and soybean yields showed small increases (as expected), acreage was reduced (which wasn't expected). The net effect was small reductions in total production instead of production increases the grain trade was expecting.

Lower corn production, along with some increases in feed and industrial uses, was partially offset by an expected decrease in exports. The result was a small decrease in ending stocks from 1.574 billion bushels (December) to 1.546 billion bushels. USDA's projected average price for the 2001 crop was left unchanged at $2.00 per bushel.

The reduced soybean production along with small demand changes resulted in ending stocks estimates of 285 million bushels compared to 330 million bushels in December. However, while ending stocks estimates were reduced (normally a positive signal for prices), USDA also lowered the estimated average annual price from $4.40 to $4.30.

The major news for wheat was a reduction in winter wheat seeding to 41.031 million acres-the lowest total since 1971! This could make crop condition concerns and weather problems more important as the season progresses.

South American weather may add more bullish news. A dry area has developed in a portion of the corn/soybean growing areas of Brazil and Argentina. If it continues, many analysts believe that South American production estimates may have peaked. No one is predicting short crops-maybe crops just won't get any bigger! Price gains may be limited. However as long as the dryness persists, it should be positive news for corn/soybean prices.

Will the South American weather and the USDA report provide a marketing opportunity for stored grain? For about two months, corn and soybean prices have trended downward following a short rally late in the harvest season. At the beginning of the new-year, both March corn and soybean futures were below prices at harvest time and in the process of setting new life-of-contract price lows. Declining futures prices have been offset by strengthening (narrowing) basis due to apparent strong cash demand. The net result of declining futures and stronger basis has resulted in cash prices about the same as they were at harvest time. This situation has not provided a good opportunity to recover storage costs and move stored grain. Higher prices resulting form the USDA report and South American weather may now provide that opportunity.

A price rally along with current basis strength could produce cash prices that would allow recovering storage costs. This would provide an opportunity to move stored grain-especially grain that has already been LDP'd. If South American weather problems persist and/or new crop production problems occur in the United States, prices might rally much higher. However, continuing to store cash grain in anticipation of these events is speculation on the weather and is very risky! Most market analysts still expect large Southern Hemisphere crops and U.S. corn and soybean planted acreage increases in 2002. Taking advantage of strong basis and a price rally to recover storage cost reduces risk and captures most of the basis gain the cash markets typically offer. Then, if you wish to speculate, using futures or options to speculate avoids potential storage losses and may be a better strategy for speculating on higher prices.

Pre-Harvest Marketing of Corn

When is the best time to market corn? Historically, pre-harvest sales made at or near planting time often capture the best prices for the crop. The seasonal corn price pattern is for prices to trend upward from the winter lows into March or April. Prices move up in response to demand for old crop that is using up supplies, the need for the market to "bid" for acres to be planted to corn and early worries about planting delays. As the planters start rolling, planting concerns start to ease and new crop prices typically begin to decline if growing conditions are good.

Weather concerns often produce price rallies in late May through June-possibly into July. If weather problems become serious and crop conditions deteriorate, sharp rallies to new price highs can occur at this time. Otherwise, the May-June rallies often peak at lower prices than March-April prices. By early July, if the crop is pollinating without problems, the market considers the new crop "made" and prices trend downward into harvest time. Demand, weather or early concerns about harvest conditions may produce a small "last chance rally" in early fall, but prices seldom exceed the levels occurring in the spring. "If you haven't made pre-harvest sales by July 4th, you've probably waited too long!"

Even with the low prices of recent years, these seasonal trends have offered opportunities. In each of the last three years (1999, 2000, 2001), March-April prices for December corn futures have exceeded October prices (for the same December corn futures contracts) by an average of nearly thirty-cents per bushel! Only in 2001, did a summer price rally push prices higher than the March-April prices and, even then, the spring prices were still above the harvest time prices. The seasonal patterns suggest strategies for being prepared to sell corn during the March-April period and planning to have all corn that must be delivered at harvest priced prior to July 4th.

Pre-harvest sales can be accomplished in a variety of ways. Cash contracts for fall delivery or hedge-to-arrive contracts enable pricing corn for fall delivery. Selling futures can also be used to lock-in (hedge) futures prices and can avoid the delivery obligations of cash contracts. A minimum price contract or purchasing put options can be used to set a "floor price" during the spring seasonal rally and still allow capturing higher prices later in the growing season. Another alternative is to purchase call options to offset cash contracts or hedges and capture summer weather rallies.

Spreading out sales or setting price targets can accomplish timing of pre-harvest sales. "Hitting the high" is nearly impossible. Spreading out sales throughout the seasonal period of high prices attempts to "average" prices during a period of favorable prices. Another strategy might be to "scale-up" sales as prices rise, again attempting to "average" favorable prices. Setting price targets is another strategy than can be used to make sales when specified prices are reached-many elevators will accept target prices and make contract sales as the prices are hit.

Using seasonal patterns to plan pre-harvest sales may not net the year's highest price, but they are usually better than harvest time prices and may be among the best prices offered for the crop.

Non-GMO Marketing

The controversy over using biotechnology to produce genetically modified (organism [GMO]) plants continues to make "news" and impact marketing. Among the "latest" are Chinese rules covering imports of GMO crops to take effect March 20th. The rules include testing, labeling and import licensing for GMO corn, soybeans, soybean meal and oil, along with some other products. All GMO products must be tested and assigned to risk categories ranging from "no danger" to "extraordinary danger." No contracts can be signed to sell GMO crops to China before import licenses are obtained. These Chinese rules and how they are applied appear to add to the confusion in trade agreements and whether there are opportunities for selling non-GMO crops.

The planted acreage of GMO crops continues to grow worldwide and U.S. farmers are expected to increase GMO crop acreage in 2002. Unapproved uses, labeling laws and precautionary import restrictions appear to suggest marketing opportunities for non-GMO crops-especially if their demand is growing and acreage planted to non-GMO continues to decline. However, low premiums along with segregation and transportation costs suggest opportunities are limited. Non-GMO premiums vary, but most range $0.05 to $0.15 for corn and $0.10 to $0.20 for soybeans. While some studies suggest little economic advantage to growing GMO crops, others cite significant advantages that current premiums won't offset. Even if non-GMO premiums are adequate to provide marketing opportunities, the lack of uniform standards for non-GMO crops and the cost/accuracy of testing can cause problems. There also is disagreement on appropriate acceptable contamination limits-is it 5%, 1% or zero tolerance?

GMO and non-GMO issues continue to make headlines and they are far from being settled. Importing country rules, such as China's, adds to market uncertainty. Successful non-GMO marketing may require searching out buyers willing to contract guaranteed premiums, careful segregation, insuring that non-GMO standards are met and avoiding liability for "accidental" contamination. Above all, whether producing GMO or non-GMO, pay more attention to market signals (price premiums or discounts) than news headlines!