It's Stored, Now What?

USDA's November supply/demand reports increased projections for record corn and soybean crops. Corn production is now estimated at 11.741 billion bushels and soybeans at 3.150 billion bushels. Wet weather slowed completion of harvest, but much of this year's record crops have been harvested and stored. Now, what plans should be made to market this stored grain?

USDA also expects strong demand with projected corn use of 10.895 billion bushels and soybean consumption of 2.808 billion bushels. However, even with the strong demand, the large production will be more than enough. Ending stocks of corn are expected to nearly double from last year's 958 million bushels to 1.819 billion bushels. Soybean ending stocks are forecast to quadruple at 460 million bushels, the largest in 19 years! Regardless of whether these projections are realized, it appears that ending stocks will likely increase.

In spite of expectations for increasing ending stocks, normally a negative price factor, corn and soybean prices have not "crashed." Futures prices for both crops opened lower following the reports, but have since recovered and soybean prices closed above chart resistance on Wednesday, November 17. This has led many analysts to believe that the "harvest lows" are in and a price uptrend may follow, especially since the discovery of soybean rust in the United States, Brazil and Argentina. However, a review of 3, 5, 7, 10, and 25 year average seasonal prices for July corn and soybean futures suggests this early post-harvest price action is fairly normal and does not necessarily signal the beginning of an uptrend.

July soybean futures prices typically form a low in October. This harvest time price low is usually followed by a post-harvest rally into November and December. Without serious production problems developing in South America, the post-harvest rally is generally followed by a price decline into February or March. While basis strength and futures market carry may lessen the impact, the late winter price low is often lower than the July futures prices during the harvest time low. Prices then tend to rally into early summer, but summer prices may not exceed earlier highs. Although each year's price pattern varies, depending upon production prospects and crop demand, these historic seasonal price patterns suggest caution in planning for soybean Soybean market signals (carry and potential basis gains) do not suggest returns for storing soybeans into next spring or summer. July soybean futures offer a premium of 17¢ above January futures prices, not enough to cover interest and storage costs into summer. Basis has already strengthened in some locations and, while expected basis recovery will provide short term gains, potential additional basis gains are limited. However, the market may offer limited short term storage return potential. Price gains from current market price strength, along with basis gains, may offer opportunities to capture some soybean storage returns. Near term sales or contracts for January delivery would capture some of these gains and reduce risk. This is especially true if the LDP has already been claimed. While a variety of factors could contribute to higher prices into 2005, current supply estimates more than meet expected demand needs. Planning to store soybeans into next summer appears to be speculation on serious production problems (weather or rust) in South America or uncertainty about the 2005 U.S. crop.

Longer term 10 and 25 year average July corn futures price patterns are similar to the soybean price patterns. Following a harvest price low, a post-harvest price rally into November may occur. Prices then often decline into late December or January before beginning an uptrend into late spring or early summer fueled by demand or new crop production concerns. One market adage says, "Always store a large crop." This saying is based on the perception that large supplies from a record crop result in low prices and weak basis at harvest time. The low prices stimulate demand and, as the crop is consumed, tighten supplies. Increasing prices are then needed to draw remaining supplies out of storage to meet the increased demand. However, in recent years (3, 5, and 7 year averages), the price trends are somewhat different. Unless new crop production problems or unexpected old crop demand emerges, average July corn futures prices have tended to decline from early fall into the next summer. This suggests caution in expecting significant price gains next spring or summer to provide storage returns.

While these historic trends discourage speculating with stored grain, the corn market is already offering the possibility of storage returns. July '05 corn futures offer a 26¢ premium over December '04 futures prices, more than enough to cover interest and storage costs. Expected basis strengthening would add to these returns. With these potential returns, the question is how long should corn be stored? As noted in last month's (October) Decisive Marketing, several elevators across Missouri are offering somewhat more favorable price bids for January delivery. These bids reflect a carry of about 11¢, offered by the March futures contract, and varying amounts of basis gain. Contracting at least a portion of stored corn for January delivery "locks in" these storage gains. An additional strategy, if January sales are made, is to re-own the corn with July call options. While this gives up the additional July carry, it could capture spring price gains at option premium costs that are comparable to the cost of storage and the strategy eliminates downside price risk.

While strong demand, weather uncertainty, soybean rust, and other factors may create pricing opportunities in the months ahead, there is also significant price risk associated with storing corn or soybeans into spring or summer. Record crops and increasing ending stocks are likely to continue pressuring prices. This suggest strategies to manage risks and capture price opportunities already available for 2004 crops that are now sitting in storage.

Asian Soybean Rust

The discovery of Asian soybean rust in the United States last week came sooner than many expected. The news of soybean rust was credited for some of the soybean price recovery following the bearish supply/demand news in the November 12 USDA reports. Since harvest is nearly complete, the discovery has no real impact on 2004 U.S. soybean production. However, it does raise concerns about 2005 and beyond production.

The first concern many have expressed is whether the presence of soybean rust will result in a shift of soybean acres to corn production. Some believe that the increased costs of applying a fungicide, along with inconsistent soybean yields in recent years, and soybean prices near $5 will cause producers to shift from soybeans to more corn acres. However, higher fuel and fertilizer costs are also making corn production more expensive. These higher costs, along with low corn prices, corn pest problems, and the need to rotate crops may limit a shift from soybeans to corn.

What about market impact? Reduced soybean production, especially if South America also has problems, could result in higher soybean prices while increased corn production might lower corn prices further. In this case, higher soybean prices might offset fungicide costs and lower corn prices would reduce corn returns.

Other factors will also influence the 2005 crop mix: spring weather, the amount of fall tillage that was accomplished, fertilizer that is already applied, etc. There is no need to panic. The early discovery of rust in the South still provides time to prepare for next season, learn how to scout and control rust, evaluate the markets, and decide how much of each crop to plant.