Positive Supply and Demand News?

USDA's May 10, 2002 Supply and Demand Report offered minimum changes in old crop (2001-02) soybean use and increased wheat imports slightly along with a first look at projections for 2002-03 crops. No changes were made in the 2001-02 (old crop) corn estimates.

Strong soybean demand continues to consume the large 2001 crop production. USDA raised the crush estimate by five million bushels resulting in an ending stocks estimate of 260 million bushels-down from 265 million in April. Some analysts believe that this still is not enough and that the final ending stocks for the 2001 crop will be lower.

The first look at the 2002-03 crops suggests somewhat positive supply and demand trends. USDA estimated trend line yields at 137.9 bu. per acre for corn, soybeans at 39.7 bu. per acre and wheat 40.1 bu. per acre.

Increased corn planted acreage intentions caused many analysts to expect the corn production estimate to exceed ten billion bushels. However, trend line yields projections resulted in a somewhat lower corn production estimate of 9.935 billion bushels. USDA predicts record corn use (10.050 billion bushels) with the help of ethanol and an increase in exports. Ending corn stocks would decline from 1.621 billion bushels (current year) to 1.561 billion bushels for 2002 crop. While supply would be more than adequate, this small ending stocks decline with the expected acreage increase should be considered positive price news.

With trend line yields, somewhat lower 2002 soybean production is expected due to lower planting intentions. While some reduction in exports is projected, crush demand is expected to remain strong. The net result is an expected small decline in ending stocks from 260 million bushels (2001 crop) to 255 million bushels (2002 crop). As in corn, supplies are expected to be adequate, however a small projected ending stocks decline is much different than early season projections of sizeable increases in recent years.

Wheat new crop ending stocks also are expected to decline. USDA anticipates that export demand will continue to sag resulting in lower total use in spite of small domestic demand increases. However, lower production will allow ending stocks to decline 119 million bushels from 738 million bushels, in the current year, to 619 million bushels.

While these report projections are not really "bullish," the good news is they aren't "bearish" either. These are only the first estimates for the 2002 crop year and the only "sure thing" is that they probably will change as the season progresses. However, with small declines in ending stocks estimates, it suggests the possibility that supplies could tighten significantly with any production problems and that it would take very good growing conditions for a substantial increase in ending stocks. This sets the stage for a "weather market."

A "weather market" might offer marketing opportunities, but it also adds marketing risk. Wet conditions, especially in the Eastern Corn Belt, are causing corn planting delays and expectations that there will be some replanting. This suggests that actual corn acreage and yields may end up less than expected with some acres switched to soybeans. Increased acreage for soybeans might be offset somewhat by later planting and lower yields. These concerns are already showing up in market trading action and could create a volatile price situation if planting delays continue or other production concerns develop. Higher prices might offer a "last chance" for any old crop grain in storage and better pre-harvest new crop pricing opportunities than have occurred in recent years. However, as long as prices remain below loan rates, risk of selling too early and not being able to take full advantage of government program price protection will exist.

Marketing Under the New Farm Bill

The new farm bill was signed into law on May 13. While not all of the details are clear, many provisions are similar to the 1996 law-some analysts have referred to it as "Freedom-to-Farm Plus." The Fixed Decoupled Payments are similar to the old AMTA or "transition" Payments, the new Counter Cyclical Payments (CCP) are similar to the old Market Loss Payments (sometimes called Extra AMTA payments) and the marketing loan program still provides for LDPs (loan deficiency payments). Will any of this have any impact on grain marketing strategies?

LDP payments will be somewhat different. The national loan rates were increased for corn ($1.89 to $1.98) and wheat ($2.58 to $2.80) for the first two years of the new program. Soybean loan price decreased from $5.26 to $5.00. While there may be other adjustments in county loan rates and how PCPs (posted county prices) are determined, the new national loan rates suggest somewhat higher corn and wheat LDPs and reduced soybean LDPs.

LDP provisions can produce negative results with pre-harvest sales strategies. The objective of the marketing loan is to support income in times when prices are low. The extended low prices of recent years led many producers to use the LDP as a speculative tool to enhance price. One method was to take advantage of historically higher spring prices to make pre-harvest sales, even if these prices were below loan price. When low harvest time prices occur, this can produce a large LDP. When the LDP is added to the higher pre-harvest sale price, even if it is below loan price, it produces a net price that is higher than loan price. For example, suppose a producer forward contracts soybeans at $4.50. If cash price at harvest is $4.00 and the LDP is $1.00, the producer's net price is $5.50 ($4.50 contract price plus $1.00 LDP). However, if the pre-harvest sales are made at prices less than loan price, the risk of higher prices and reduced (or no) LDP should be recognized. This situation could produce net prices that are less than loan price. In the previous example, if cash price at harvest is $5.10. The producer's net price would be only $4.50-the contracted price with no LDP!

What futures prices will it take to produce cash prices near loan price? Assuming basis patterns for most Missouri locations will be similar to recent year, the following new crop futures prices would produce harvest time cash prices near loan price: December Corn $2.30 to $2.50, November Soybeans $5.35 to $5.50 and July Wheat near $3.15. If new crop futures moved above these prices, there would likely be no LDP.

Counter Cyclical Payments may include pre-harvest marketing concerns. Like the marketing loan, CCP are to provide income support during low price periods and could produce undesirable results for early pre-harvest sales. Most grains are marketed over 18-month or longer periods (6-9 months before and 9-12 months after harvest). Pre-harvest sales are made during a 6-month (or longer) period prior to harvest, while CCP are based on average prices for the 12-month marketing year following harvest. This creates a situation where pre-harvest sales could be made at lower price levels and before CCP marketing year calculations are started. If prices go up after the sale, there might not be CCP to supplement income as expected when the sale was made.

Pre-harvest sales strategies should include the use of options or other flexible pricing tools to manage risk when prices are lower than loan price. Historical seasonal price patterns suggest that some of the best prices are captured with pre-harvest sales or hedges. In recent years these sales combined with the LDP enabled some to capture net prices well above loan. The Market Loss payments also provided additional income for the "bottom line." The similarity of the new program suggests similar strategies may continue to work. However, strong grain demand and signs of tightening grain supplies suggest the potential for price volatility. While higher prices are desirable, some producers could get caught off guard with pre-harvest sales below loan price and without the protection of the LDP or CCP. Buying call options to offset sales or using minimum price contracts are examples of two strategies that could be used to protect against these potential risks.

The new program changes the "cash flow" of the government program payments and this could affect timing of marketing. CCP begin with an estimated 35% available in October (at harvest time). Another 35% estimated payment could be received after February 1 with the final payment made after the end of the marketing year-about a year after the crop has been harvested! In addition, a 50% direct payment is available in December, prior to the crop year, with the balance in October. This contrasts with the current program where all of the AMTA payment could have been received in advance and the total market loss payments were available in the fall. These provisions delay the "cash flow" of government program receipts and timing of market sales may have to be adjusted to meet business cash flow needs.