What Happened to Storage Returns?

Market signals at harvest time (September and October) suggested potential returns for storing 2005 corn and soybean production. Weak basis was causing low cash prices and suggesting the possibility of greater than normal postharvest basis gains. Distant month futures price premiums offered a "carry" that also would add to potential storage returns. However, large crops and expected increases in projected ending stocks suggested futures price gains would be limited and futures prices continued to show weakness. Storing corn and soybeans to capture the expected basis gains and market carries appeared to offer the best opportunity to recover storage costs and earn storage profits.

So far, the success of storing corn and soybeans has depended largely upon location and timing. For those located in southeast Missouri, other points along or near Mississippi River delivery points, or near a large user, cash corn and soybean price recovery or basis strength has contributed to profitable storage returns. However, in recent weeks, corn and soybean basis has weakened somewhat in these areas. In western and northern Missouri locations, storage returns have been much more difficult to obtain as limited basis gains were largely offset by futures price losses following the completion of harvest. Regardless of location, the futures price rallies during late December and into the first few days of January offered the best (or only) opportunity to capture storage returns. The futures price declines since then have erased the possibility of storage profits in all but a few locations.

USDA’s January 12, 2005 supply/demand reports contained discouraging news for those hoping that higher prices might offer additional opportunities for storage returns. Small increases to corn and soybean production added to supplies, and export projections for both crops were reduced. The expected 2005-06 corn carryover of 2.426 billion bushels is the largest since 1987-88 and soybean projected ending stocks of 505 million bushels are the largest in twenty years! World grain/oilseed supply projections were increased, and adding to the negative USDA report news are weather reports suggesting that growing conditions in South America are improving. These factors appear to be contributing to the price declines that occurred during the past two weeks. However, in spite of the sharp futures price declines, corn and soybean prices are near the midpoint of USDA’s projected price range. This suggests that significant downside price risks remain.

The harvest time market signals were valid. Basis gains and market carry in the March futures contracts have offered returns, but location and futures price action have limited these returns. Additional basis gains, especially for western and northern Missouri locations with weaker than average basis, may still occur. May and July futures prices offer additional carry or price premiums that may recover additional onfarm storage costs. The historical seasonal price patterns suggest that cash corn and soybean prices often rally into spring, but these rallies might be limited to the carry already in the futures market with somewhat higher prices for deferred month futures prices. With the current outlook, it appears that additional opportunities for storage gains for corn or soybeans may be limited or difficult to obtain. Any additional basis strength and futures price increasess that offer cash prices at or above storage breakevens should likely be viewed as selling opportunities.

Looking Ahead at 2006 Crops

Burdensome supplies and high energy prices raise serious questions about the outlook for 2006 corn and soybean production. Low crop prices and expensive input costs squeeze already tight margins, reducing profit potential and increasing risks.

Most analysts expect a reduction in corn acres, along with more soybean and wheat acres. Although of the increased winter wheat plantings, Soft Red Winter wheat comprised most of the increase and this is the class of wheat with probably the most price negative supply/demand situation. Corn production requires more fuel and expensive fertilizer inputs than soybean or wheat production, so it seems logical that corn acres will be reduced at least 1 to 2 million acres. The large carryover of soybeans also makes growing soybeans less attractive and, while not as much fuel or fertilizer inputs are needed, higher input costs will impact soybean production as well. However, with somewhat lower than corn input costs, most analysts expect soybean plantings to increase. In spite of continued strong demand, trendline yields would produce 2006- 07 corn/soybean supplies that are more than adequate and prices are likely to remain depressed.

Historically, some of the best new crop pricing opportunities occur at or before planting time. Prices typically rally from winter lows into March or April for corn and April or May for soybeans, which often provides one of the best selling opportunities. Caution, increased South American production may alter this pattern somewhat for soybeans and limit higher price potential. Sometimes a later rally based on weather concerns provides another opportunity in late June or early July. At this point, unless seriously damaging weather occurs, prices typically decline into harvest time lows. This helps explain why waiting to make new crop sales until after the "FourthofJuly," when production prospects are better known, is usually not a good idea. Combining crop insurance as part of a risk management program can reduce production risk and make early season sales decisions easier. Purchasing call options when prices are near winter lows is another strategy that provides "price insurance" to cover preharvest sales should market conditions produce higher prices later in the season. Adding these tools to market plans can increase confidence in making early season sales when production and price risks are a major concern.

Weather may influence production decisions and it nearly always has a positive or negative impact at some point on market prices. Plant genetics were given considerable credit for last year’s amazing corn and soybean production with drought conditions in the heart of the Corn Belt. However, other factors had an impact too. Much of the drought area began the year with adequate or surplus soil moisture. The dryer western Corn Belt received timely rains. The crops were planted timely, got off to a good start, utilized soil moisture supplies, and the late season hurricanes provided some moisture relief in the eastern regions, along with weather patterns that helped create near ideal harvest conditions in most corn/soybean growing areas. This year the situation is much different. Unless conditions improve, moisture depleted soils in the Midwest and drought conditions in the southern plains may impact crop production prospects. This could provide a chance for a weather market rally, but remember it is only a "chance" and highly speculative at this time. Although weather conditions could spark price rallies, large carryover supplies and production capacities suggest supplies should be more than adequate, even with some weather problems. At this point, any weather related price rallies should be considered potential selling opportunities instead of a possible change in price trend.

Current new crop corn (December ’06 futures) and soybean (November ’06 futures) prices appear to be at levels significantly above the expected average prices resulting from a few of the early 2006-07 supply/demand outlook projections. This suggests that any price rallies probably offer a good opportunity to begin making new crop corn and soybean sales.