What a Year!

This year began with grain prices in an uptrend. By late February new crop (December 2007) corn futures prices rose to nearly $4.30 per bushel and soybeans (November 2007) futures were near $8.40. In spite of expected high production costs, these crop prices suggested significant profit opportunities. Field operations in central and southern Missouri began in March. Then the "Easter freeze" in early April damaged or destroyed a large amount of wheat along with some of the early planted corn. Following the unseasonably cold weather, some of the freeze damaged corn acres that were replanted, along with some of the other early planted corn, have been covered with flood waters. Besides the flooding, the rains also continued to delay planting in most of central and north Missouri. As of May 13, more than 60% of Missouri's intended corn and soybean acres were not planted suggesting less than optimal yields. Now, with renewed talks of La Niņa, there is concern that a dry summer could follow the wet spring. What appeared to start with the potential for the "best year ever" has become a much more difficult production situation than expected.

Besides production worries, marketing also presents a challenge. Wheat futures prices near or above $5.00 per bushel had offered producers opportunities to forward contract production. However, following the freeze, many producers with nearly total crop losses were forced to roll those contracts into 2008 or buy them out. Some corn producers who took advantage of $4.00 plus new crop corn futures prices may be facing a similar situation with corn that was flooded or ground that remains too wet to plant. While cash contracting for harvest delivery is a relatively simple method of capturing pre-harvest market opportunities, delivery obligations when production is lost is a major disadvantage of this marketing tool.

Although there are risks associated with any market strategy, current corn market action also illustrates why capturing pricing opportunities is important. In spite of planting and acreage concerns, corn prices seem to be going the wrong way! December 2007 corn futures are about fifty-cents per bushel less than they were in February. Although prices have declined, the USDA's first monthly supply/demand projections (released May 11, 2007) suggest the potential for continued tight corn supplies. Their estimates used the March surveyed planting intentions of 90.5 million acres and trend yields that were adjusted to compensate for planting delays. The result was a forecast production of 12.460 billion bushels. But projected use, lead by increasing corn demand for ethanol use, is expected to slightly exceed production at 12.465 billion bushels. Corn carryover is projected to remain less than one billion bushels and market analysts express concerns about whether all of the 90.5 million acres will actually get planted. Nationwide, planting appears to have caught up with the break in last week's weather. But producers in northern Missouri and southern Iowa are among those that remain behind, and may shift, intended corn acres to soybean production. This suggests that not all of the 90.5 million acres will get planted to corn. USDA has already adjusted trend yield estimates downward due to planting delays. Any additional planting delays or dry summer weather could result in additional cuts to yield expectations. With already tight carryover supplies expected, fewer acres and any yield reductions would reduce production and draw expected ending corn stocks down to critical levels, sending prices sharply higher.

The soybean market continues to confound many market analysts. Large crops in South America and record 2006-07 US ending soybean stocks, along with the potential for increased acreage (producers are expected to plant soybeans on failed wheat acres and corn acres that may not get planted), would appear to be negative news for soybean prices. However, after slipping nearly 80 cents per bushel from price highs in February to lows in April, new crop soybean futures prices have rallied and are again above $8.00!

Fund buying, growing biodiesel demand, a weaker dollar supporting exports and reduced 2007 planted acreage are among some of the reasons for strength in soybean prices. May USDA supply/demand projections use the intended acreage of 67.1 million acres and trend yields of 41.5 bpa to arrive at total estimated 2007-08 production of 2.745 billion bushels. Use is expected to total 3.039 billion bushels and cut carryover by almost one-half to 320 million bushels. Although soybean supplies are expected to be more than adequate for 2007-08, use cannot continue to exceed production by this amount. Soybean prices will need to bid for acres in 2008. This may already have begun as some analysts point out that the current rally in soybean prices is bringing the soybean/corn price ratio back to more normal levels compared with last winter's price ratios that greatly favored corn. Summer weather that threatened production would potentially further tighten soybean supplies and fuel higher prices.

In spite of the recent weakness in corn prices, new crop corn and soybean futures remain at high price levels rarely available at harvest time. But planting delays and damaged crops make decisions to add to new crops sales more difficult, especially since tight supplies could create volatile and sharply higher prices if summer weather results in an extended dry period. However, the price decline following the February highs also illustrates the existence of downside price risk. Lower prices could occur if production meets expectations and large trading funds continue to liquidate their long futures positions. The anticipation of large corn production and limited storage availability suggests weak harvest time basis as well.

Market plans should be adjusted to reflect changes in production expectations, but that doesn't necessarily mean avoiding sales. Plans should remain in place to make sales that capture profitable prices. If production concerns limit the amount of sales that can comfortably be made using cash contracts, other strategies can be used to protect prices. Although option premiums are expensive in volatile markets, they can still be used to effectively protect profitable prices and manage risk. Those more comfortable with using options or futures contracts may be able to reduce net premium costs with a variety of spread or combination strategies.

What a year! And it has not even reached the halfway mark yet. The weather and markets have already thrown a lot of adversity at producers. Considerable production and price risk remains. But tight supplies and strong demand continue to offer the potential for higher prices and favorable pricing opportunities. These pricing opportunities should be captured with additional sales whenever they are offered.