Low Priced Soybeans and Corn, Store or Sell?

Shocking is the word used by many analysts to describe USDA's October 12 Supply and Demand Report. New crop (2001-02) production increases for corn and soybeans exceeded nearly everyone's expectations.

The largest soybean acreage ever, with the second highest yields (39.2 bpa), will produce a record crop of over 2.9 billion bushels of soybeans and push total supplies above 3.1 billion bushels. In spite of strong domestic crush, an expected decrease in exports will allow ending stocks to grow to an estimated 345 million bushels. Increasing ending stocks generally means lower prices. The 26-year low in soybean prices occurred during the 1998-99 crop year with a similar level of ending stocks.

USDA also expects world production and ending stocks to increase. Increased South American production is expected to take a larger share of world exports. In addition the government program provisions still favor soybeans and will likely lead to another large U.S. planted acreage in the spring. This combination of a big South American crop and large U.S planted acreage limits any chances for a spring price rally.

The negative information produces a bleak outlook for soybean price. USDA lowered their expected average price fifty cents per bushel from the September estimate. They currently estimate a farm price range for soybeans of $3.90 to $4.70 ($4.30 average). Most current Missouri cash bids are near or below the low end of this expected price range and LDPs (loan deficiency payments) have been $1.25 or more.

Low prices and one dollar plus LDP, sounds like the same situation as last year. Not exactly, last year (2000-01 crop) low prices were due in part to very weak basis (-$0.40 to -$0.50 in Central MO) suggesting the potential for a twenty-cents or more basis recovery. In addition, distant month futures contracts offered nearly twenty-cents of market carry (premium for storage). Basis and market carry were market signals to store soybeans and contributed to a mid-December to early January price recovery. This year soybean basis (most Missouri locations) is somewhat stronger, suggesting less potential basis gain than in previous years. The March futures contract premium has been shrinking since the report and the carry is now less than ten cents-much less than the cost of storage. Small market carry, limited basis gain potential and a poor price outlook all suggest that long-term storage is very risky and offers little opportunity. It appears that if any significant price rallies occur, they will be in the futures market and these gains can be captured using futures or options with less risk than storing cash soybeans.

What should be done with soybeans? Market signals do not offer profit potential for storing soybeans. The simple answer is to just collect the LDP and sell the beans! However, prices are at the low end of the projected price range and it can be argued that downside price risk is limited. An alternative might be to collect the LDP and wait for a post-harvest price bounce to sell the soybeans. This would be a very short-term strategy aimed at only short-term price gains following harvest lows. If lower price risk is a concern, purchasing put options would provide protection. For those still expecting (or hoping for) higher prices, the strategy could then be looking for opportunities to re-own the soybeans on paper with futures or call options.

Income tax management decisions may override soybean-marketing decisions. Cash basis taxpayers, who sold old crop grain in the current tax year, may wish to avoid selling two crops in one tax year. If the tax consequences of selling are greater than the risk of marketing losses from storage, then the decision may be to store until the New Year. Taking the LDP and storing is a speculative strategy with downside price risk until January. Other strategies might help limit this price risk. If a post-harvest price bounce occurs, it may offer opportunity to forward price soybeans in storage for January delivery and still manage cash basis income. Another alternative might be looking for a price bounce to hedge stored grain by selling futures or buying put options.

The market situation for corn is different. The USDA Supply and Demand report contained negative news for corn with higher production and increased ending stocks projections over the September report. However, consumption is still expected to exceed production resulting in a decline in ending stocks from the current year! In addition world supplies are declining and most do not expect any significant acreage shifts to corn over soybeans in 2002. This leads to a more positive long-term outlook for corn prices.

Current harvest time prices are near or below USDA's projected price range of $1.90 to $2.30 and LDPs near $0.20 have been available. Opportunities for using the LDP to enhance price may be limited to this harvest time period of low prices. Premiums for March futures contracts over December suggest a market carry of $0.12. This along with potential basis recovery suggests a return to storage of corn into late winter or early spring.

One strategy is to collect the LDP and store grain to capture basis gains and speculate on market carry and higher corn price. An alternative, to reduce lower price risk, could be to place corn under the CCC loan. The 60-day lock-in could then be used for capturing market loan gains to enhance net price while speculating on higher prices. Using the loan also provides cash for year-end business obligations. Long-term storage will depend upon how basis recovers and the potential for price rallies. Using short-term storage to capture storage returns, then selling the corn and re-owning using futures or call options might be a better alternative than long-term storage. Remember, the key to any successful strategy is to remain flexible to changing market conditions.

Corn Price Risk for Value Added Producers

USDA's October 12 Supply and Demand Report for corn, while increasing production, continued to show expectations of strong demand and consumption that will exceed the current year's production. This reduces ending stocks at the end of the 2001-02 crop-marketing year. Declining ending stocks usually suggest higher prices, but other supply and demand factors affect price (such as the increased production estimate, harvest time price pressure, etc.). These other factors help explain current low corn prices.

Another measure of price risk relating to supply is the ending stocks to use ratio (ending stocks divided by total use). This measures the amount of ending stocks relative to total use and provides a more accurate picture of the amount of "supply cushion" the stocks represent. Using USDA's current estimates produces an ending stocks/use ratio of 14.8, which says ending stocks will be 14.8% of total use or less than two months of supply left over at year-end. While this is not an uncomfortable ratio, it is significantly less than the current year's ratio of 19.4 and is below the most recent ten-year average. This indicates a trend toward tighter supplies and less of a "cushion" for lower production.

The trend toward tighter supplies suggests increasing price risk for value added producers. For example, corn represents an input cost item for an ethanol cooperative or for retained ownership of livestock through a value chain. Corn price can also impact pricing of identity preserved product contracts. A shrinking ending-stocks/use ratio and lack of expectations for significant increases in 2002 corn acreage increases the potential for volatile corn prices--especially if weather related problems develop next summer. The possibility of sharply higher corn prices could have a significant negative impact on value added profits.

These higher value added input price risks can be managed. Current low prices offer the chance to "lock-in" production needs at low price levels through a variety of methods. Cash corn could be purchased and stored until needed. An alternative to storage would be to contract for cash delivery, as the corn is needed. Buying futures contracts or purchasing call options also could hedge corn price. Added value producers, to protect against higher corn costs and protect profit margins, can use any of these strategies.