October S & D Report - Tight Supplies

Corn, soybean and wheat futures prices rose to life-of-contract highs in anticipation of the September USDA Supply and Demand (S&D) Report. During the month following the report that many described "about as expected," corn prices decreased more than forty-cents, soybeans slipped more than sixty-five cents and Chicago wheat was down about fifty-cents. The October S&D Report also could be termed "about as expected." USDA now estimates corn production at 8.897 billion bushels, up slightly when compared to September's estimate of 8.849, but still the lowest in 7 years! Soybean production estimates were essentially unchanged, but increases in 2001 ending stocks contributed to a 15 million bushel increase in 2003 projected ending stocks. Wheat production was reduced by 61 million bushels to 1.625 billion bushels. The wheat supply numbers are bullish. While the corn and soybean production estimates remain near expectations, harvest pressure and other factors have contributed to significant price declines.

Supplies of all three crops are tight. The projected 2002-03 wheat ending-stocks (371 million bushels) is the lowest since 1973-74! New crop corn ending-stocks of 764 million bushels are the lowest since 1995-96-the year of record high prices. Projected 2002-03 soybean ending-stocks of 175 million bushels are well below average.

Tighter supplies should equal higher prices and USDA's estimates include higher prices for the 2002-03 crops. The average price for corn is expected to be $2.50 compared to $1.97 for the 2001 crop. Soybeans are expected to average $1.15 per bushel higher at $5.50 compared to $4.35 for the previous crop. Wheat prices are estimated nearly one-dollar higher at $3.75 compared to $2.78 last year. The question everyone would like to have the answer to (and no one has) is: Did 2002-03 grain prices reach their peak just prior to the September USDA Reports or will they rebound later?

Prices - Up, Down or About the Same?

Bulls - 10 reasons for higher prices.

1. Drought reduced crops resulting in the lowest projected ending corn stocks since 1995-96 (year of record prices) and the lowest estimated wheat ending- stocks in nearly thirty-years!
2. Soybean yields are disappointing and USDA didn't increase production estimates as much as expected in the October Supply and Demand Report.
3. Prices haven't been high enough to "ration" tighter grain supplies and USDA projects increased industrial use of corn and soybeans.
4. New crop corn exports are expected to increase in comparison to this past year.
5. Uncertain weather (Brazil) and economic problems (Argentina) may limit production expansion in South America.
6. Harvest pressure will pass, the price lows may already be in place. Stronger basis, than in recent years, suggests strong underlying cash demand for grain.
7. Crop acres are limited; it is not likely that significant increases in planted acreage of all three crops (corn, wheat, soybean) will occur.
8. Soybean demand has been strong. Use may exceed USDA projections.
9. Slower than average harvest progress (especially in good production areas) may increase crop losses, causing USDA's October estimates to be overstated.
10. Price decline (on charts) has been overdone by massive fund liquidation (selling).

1. In spite of drought, corn yields are better than earlier expected and USDA increased the corn production estimate in the October Supply and Demand Report.
2. Old crop soybean supplies are higher than previously thought and will increase 2002-03 ending stocks even though October production estimates were less than the trade expected.
3. Higher prices will slow consumption. USDA projects a decline in corn feed use.
4. Corn and soybean exports are slower than expected.
5. Harvest pressure will continue to depress prices.
6. Improved moisture conditions, in the Plains, have improved next year's wheat prospects.
7. South America will respond to higher prices and increase production-maybe 8-10%!
8. Lack of government program payments (no CCP or LDP) will force cash sales for cash-flow needs-depressing prices.
9. U.S. will increase crop acreage next year.
10. Chart (technical) trends have been down during the last month-taking out support levels and suggesting, "short crop price peaks" have already occurred.

When comparing the current tight supplies with historic prices in similar tight supply situations, it's possible to conclude that grains are under priced. This coupled with the preceding bullish arguments for higher prices is leading many producers to store new crop corn and soybeans. However, the bearish arguments point out negative risks to this strategy and the possibility that prices may have already peaked. Uncertainty about demand, crop production in south America, U.S. planting intentions for 2003 and weather will continue to influence the market during the winter and likely continue into next year's production season.

Storing new crop corn and soybeans is a speculative decision. The markets are signaling only limited storage return potential (market carry and basis gain). The March corn contract offers a premium of only seven-cents over December and January soybeans carries a premium of five-cents above the November contract. While harvest pressure has weakened soybean basis, both soybean and corn basis levels remain stronger than in recent years-potentially limiting the amount of basis gain that may be captured with storage. For both crops, basis gains and market carry offer (at best) only break-even returns for storage into the New Year. This suggests that higher (or lower) prices and storage profits will depend on the futures market.

While there are solid arguments for higher prices, is storage worth the risk? Soybean prices slipped to near loan price last week, at which point the LDP (loan deficiency payment) and potential CCP (counter cyclical payment) would provide some downside price protection for short-tem storage of soybeans. As long as corn prices remain at current levels, downside price risk for stored corn remains unprotected by the loan program and CCP won't be triggered. Limited basis potential, narrow market carry, price risk and storage costs do not suggest storage returns. Other than managing cash income for "cash basis" income tax calculations, storage seems to offer little advantage over selling grain and re-owning it with futures or options for those anticipating higher futures prices- especially for corn or soybeans in commercial storage.

Tight grain supplies and higher prices have created a situation where there are valid arguments for prices going up, down or staying about the same. This uncertainty may provide marketing opportunities in the coming months, but it also produces downside price and storage loss risks for grain producers hoping for higher prices. It's important to consider both sides of the higher/lower prices argument before making a decision on which marketing or storage strategy to use. The opposite price risks occur for livestock producers' feed costs and farm gate values for added value enterprises where grain becomes an input cost.