| March 19, 2010 | Archived Issues |
Avoid Having To Sell At The Low
The results of a resurvey of producers for USDA’s March supply/demand estimates did not lower 2009 corn production estimates as much as many had hoped. Corn yield was only cut 0.3 bpa to 164.9 bpa and production is still a record at 13.131 billion bushels. Domestic use continues to be forecast at a record level, but export projections were reduced. Although world corn and coarse grain ending stocks are projected to be below last year, improving foreign production estimates continue adding to foreign and world carryover projections. These increases, along with large world wheat supplies, limit US corn export potential. With disappointing exports US corn 2009-10 ending stocks are expected to swell to 1.799 billion bushels.
US Soybean 2009 production was down two million bushels, but also remains a record at 3.359 billion bushels. Although increases to expected crush and exports will keep 2009-10 domestic soybean ending stocks tight at 190 million bushels, large South American crops are expected to push world soybean carryover to the second highest level ever. This means that export business will likely soon shift to South America and export demand for US soybeans will slow. China cancelled some sales last week, which may signal that they are now turning to South America for new soybean purchases.
There is a market adage that says, “One bushel of ending stocks is bearish.” This saying is based on the market’s use of price to balance supply and demand. If anything is going to be left over then prices should be lower to use it up. In most cases the markets are not comfortable completely using up all supplies, but prices should be low enough to encourage using up what the market considers excess supplies. Increasing ending stocks means there is more than enough supply to meet demand needs and points to lower prices. The larger US corn ending stocks, the increasingly large expected world soybean carryover and burdensome wheat supplies all combined to provide bearish market news.
A number of factors could contribute to more downside price risk. Current crop conditions and harvest reports in the Southern Hemisphere suggest that the bearish supply numbers may only get more bearish. Most analysts expect 2010 US corn acreage to increase and only small changes in soybean acreage. This suggests that production should again be more than adequate with trend line yields. Uncertain economic conditions, reduced livestock feed use, lower energy prices, a stronger dollar and position liquidation by speculative traders are other factors to watch for.
Not everything is price negative. Some market factors could support prices. Recent strength in oil prices and weakness in the dollar have supported grain prices. Economic recovery, investment fund purchases and improved livestock returns would also support grain/oilseed prices. The USDA’s Prospective Plantings report will be watched to determine whether producer intentions match analysts’ expectations for 2010 crop acreages. Although it is still early, weather is beginning to raise concerns for 2010 crop production outlook. Continued wet and cold weather, the potential for flooding and un-harvested crops along with the lack of fertilizer applications and field preparations suggest the possibility of delayed planting. The past two years of large production, in spite of late plantings, may make the market slower to react. However, planting delays or acreage shifts would be worrisome and likely support prices.
Corn 2010-11 price projections suggest potential profits in the coming year. FAPRI baseline projections (FAPRI-MU Report #01-10 at: www.fapri.missouri.edu ) for 2010-11 corn prices are for US farm prices to average $3.72. This is in-line with the estimates of other market analysts and USDA that mostly range from $3.60 to just over $3.80. However, some are pessimistic with forecasts of prices dropping to near $3.00 or lower. Others see upside potential for corn prices to $4.60 or higher. This is a range of estimates of $1.60 per bushel. It is possible that futures prices and cash bids could vary more than that.
Watching price action closely may be critical for making sales decisions. December 2010 corn futures prices bounced back this week from recent declines. Current futures prices would produce new crop cash corn prices, assuming normal basis, near most of the 2010-11 average price projections. These are profitable prices for most Missouri producers. If corn prices break out of the bottom of recent trading ranges on nearby futures, the downside price risk increases and the decline might be significant. Price risk could extend down to the more than three-year futures price low near $2.90 that occurred in early November 2009. These futures prices would produce even lower cash bids that would result in red ink for growing corn. If corn prices to break out of the top side of recent price ranges, this would open up the possibility of significantly higher price opportunities in excess of $4.00.
The soybean price situation is similar to corn. The FAPRI baseline projects 2010-11 average soybean farm prices at $8.89. Projections by other analysts generally range from about $8.80 to near $9.10. But some forecasts are down to about $7.50, while others are near $11.00 on the upside. Again a very wide price range with volatile market possibilities.
November 2010 soybean futures prices have recovered this week to levels that would result in harvest time cash bids near most of the 2010-11 average price forecasts. These prices are well above expected breakeven price levels for Missouri producers. If futures prices move above recent trading ranges, it opens the way for higher prices and higher returns. However, if prices break out below recent trading ranges, the downside risk increases. The nearly three-year low for nearby soybean futures prices is the November 2009 low of about $7.90. While this price level would still result in cash prices above breakeven for most Missouri producers, it would significantly limit profits.
Do not get caught having to sell at the price low! It is important to remember that trying to sell at the highest price is not a realistic marketing objective. The market high is nearly impossible to determine until after it is past. However, trying to avoid making sales near the market price low is reasonable and should be one of the first objectives of a marketing plan. While the low is also hard to predict and cannot be determined until it is past, it is more likely to occur at harvest time than at other times during the year. This means that, for grain that will be delivered at harvest, pre-harvest sales are more likely to net a higher price and avoid a price low.