Poor Time to Sell?

July and August are usually not good times to sell new crop corn or soybeans. The average seasonal price pattern for corn is prices slipping lower from early July into August-especially if growing conditions are good and the crop begins to appear made. In recent years, the season price pattern for soybeans is to establish a July summer low and then trade in a sideways range with some up and down movements into early August. A late August or September "last chance" rally sometimes provides a pricing opportunity in both crops before prices decline to harvest lows-especially if late season crop conditions deteriorate or there are concerns about early frost. While pricing prospects may not be particularly attractive in the coming weeks, harvest time prices can be worse, often resulting in the marketing year price lows.

Will corn and soybean prices follow the typical seasonal patterns this year? So far, they have. December '04 corn futures peaked in early April. November '04 soybean prices also peaked in April, followed by a rally to nearly the same levels in early May. These spring highs were right-on-track for following the seasonal price patterns. Since these spring highs, both corn and soybean new crop prices have been in downtrends (July lows?), again right-on-track to match the seasonal trend. With new crop corn and soybean prices well off their spring highs, potential for record crops and seasonal trends suggest the prospect of lower prices ahead. Will there be any opportunities to get more favorable prices on grain that will be delivered at harvest?

December corn futures prices have declined more than 80 cents! The corn crop condition ratings are high and planted acreage has increased to nearly 81 million acres, suggesting potential for a huge corn crop. Recent exports have been disappointing. Current estimates for both old and new crop corn ending stocks, while not burdensome, represent increases over previous projections. However, demand appears strong with ethanol use continuing to increase. World supplies remain tight and a downtrend in the value of the dollar could contribute to renewed strength in exports. The market has a big crop built into prices, but a big crop is needed and relatively small changes in the average yield could easily tip the balance from more than enough corn to barely enough.

At current price levels, selling opportunities for corn appear limited. December corn futures prices result in cash prices that are in the lower one-half of USDA's projected price range, suggesting that higher prices should occur at some point in the marketing year. For those looking to add price protection, a covered call strategy (selling an out-of-the-money call option) is among a few possible strategies that might offer some price risk management for corn to be delivered at harvest time. For example, selling a December $2.60 call option nets a premium (received) of 8 to10 cents. If prices continue to decline, this premium would add almost 10 cents to whatever cash price is received. If prices rise and the call option is exercised, a short futures position (selling futures) would be required. However, since the growing corn "covers" or offsets the option or short futures position, the exercised short futures position becomes a hedge at $2.60 and the premium adds another 8 to10 cents. This results in a net hedged price near $2.70 in December futures and somewhat above USDA's projected average price.

New crop (November) soybean futures are about $1.50 lower than the spring highs, but current prices still represent prices in the mid to upper portion of USDA's projected price range. While it is difficult to sell after such a large price decline, downside price risk should be recognized and current prices may still be offering opportunities. While the soybean planted acreage (74.8 million acres) was down somewhat from planting intentions in March (75.4 million acres), with projected trendline yields a large crop will be harvested. Acreage could increase, since the acreage report was as of June 1 and late planted or double crop acres could potentially increase the final total acres. South American yields also are expected to rebound and acreage increase. Demand remains strong and the United States will essentially run out of soybeans just before the new crop harvest begins, keeping old crop (2003 production) soybean prices relatively high. However, without weather problems, U.S. and world soybean supplies are likely to increase and soybean prices for 2004-05 can be expected to decline.

Since current new crop prices still represent prices in the upper half of USDA's projected price range, they should still be considered potential opportunities-especially if no new crop sales were made near earlier highs. Soybean option premiums are expensive, but a "fence option strategy" (buying a put option and selling a call option) may offer opportunities to establish a price floor and capture a higher price if soybeans rally. For example, buying a November $6.40 soybean put option at a premium of 42 cents and selling a $6.60 November soybean call at a premium of 34 cents results in a net cost of 8 cents ($0.42 paid minus $0.34 received). This provides a November futures price floor just above $6.30 ($6.40 strike price minus $0.08 net premium), about the mid-point of USDA's projected price range. If prices rise and the call is exercised, it results in a short hedge price just above $6.50 ($6.60 minus $0.08) and a price in the upper one-half of USDA's projected range. Either situation could produce favorable prices if soybeans follow a typical pattern into harvest time lows.

Price volatility may continue in the weeks ahead. Additional exports or other demand strength will impact tight U.S. and world grain supplies. Weather could have a major price impact-"all it would take is 2-3 weeks of hot and dry conditions." However, at this point, crop conditions appear good and the potential for a large crop suggests the possibility for lower corn and soybean prices at harvest. Although previous highs are past and may never return. Try to not look back at these missed opportunities. Avoiding harvest lows and capturing any new pre-harvest pricing opportunities should be the near-term marketing objective.

Store Wheat?

Wheat prices have declined under pressure from harvest and downtrends in corn and soybean prices. CBOT wheat futures prices are about $1 off of spring highs. But wheat acreage is down and U.S. ending stocks are expected to decline from previous years. World wheat supplies are also relatively tight. Wheat futures prices tend to set lows in July (peak harvest time) followed by a seasonal price recovery into October or November. December CBOT wheat futures are trading near $3.46 (7-16-04) compared to September futures' $3.33, for a carry (storage return) of 13 cents. This signals the market is willing to pay a higher price for wheat to be delivered in (or stored until) late fall. Should wheat be stored to capture this potential storage return and any additional seasonal price rally?

The problem with storing wheat in Missouri is basis (cash price difference from futures price). Missouri wheat basis historically tends to weaken (negative spread widens between cash and futures price) into September and October. This occurs as producers clean out bins for corn/soybean harvest and deliver wheat to elevators that are also preparing for fall harvest and want to discourage wheat deliveries. This weakening of basis often offsets the typical seasonal futures price recovery, potentially leaving little or no storage returns even when wheat futures prices have increased!

Current Missouri wheat cash prices represent a stronger (narrower cash/futures price spread) than the average of recent year's basis-a cash market signal that the market wants wheat delivered. This strong basis may represent even greater basis risk for storing, since a decline to normal September/October levels would represent a greater than normal cash price decline relative to any futures gains.

An alternative strategy, instead of storing wheat, would be to sell the wheat and re-own it on paper with futures or call options. Selling would capture the current strong basis. Re-owning the wheat with futures/options would enable capturing seasonal futures price gains. Call option premiums are comparable to storage costs, especially if the wheat is in commercial storage. In addition to capturing the strong basis, the strategy provides cash from the wheat sale, frees up storage and reduces storage risks.

Old Crop Corn and Soybean Basis Opportunities

Still have old crop corn or soybeans? If so, shop around for strong basis before selling. Spot soybean demand has offered significant premiums over many local or terminal locations where soybeans are customarily delivered. Premiums of up to 30 cents per bushel, or more, above extra trucking costs have been possible for soybeans in some locations recently. Corn prices offered in some corn deficit areas have also justified additional trucking costs to capture 10 to 30 cents per bushel premiums. However, prices are volatile and premiums offered one day may be gone the next. The basis variability suggests that it is good idea to check prices at several locations before the truck leaves the farm.