. . . Never Been a Year Quite Like This!

Historically production of corn and soybeans has followed similar patterns. Favorable growing conditions resulting in record production of one crop usually also produce a large or near record crop of the other. In poor growing seasons, lower yields of both crops result in reduced corn and soybean production. However, USDA's October 10 crop report indicates that this year a variety of factors have resulted in an unusual combination of a reduced soybean crop and a record corn crop. There's never been a year quite like this one and unusual situations generally present marketing challenges or risks. What market signals are being provided and what strategies are needed for corn and soybeans?

USDA projects a record high corn yield (142.2 bpa) producing record total production of 10.207 billion bushels. Dry conditions, beginning in July and through August, caused concerns and crop conditions appeared to be declining. Yields in areas of the Western Corn Belt have suffered, but for others (further east) surprisingly good yields are exceeding expectations and providing the record production. Carry over supplies are expected to increase to 1.353 billion bushels at year-end and prices will be lower with a mid-point estimate of $2.10 per bushel. In contrast to large U.S. supplies, world corn supply is very tight. Declining world supplies should provide support to corn prices and, if (it is a big if) U.S. exports increase, increased exports would be positive to prices. This week's (Oct 17) corn export sales were well above expectations and total sales are running ahead of last year.

A harvest time marketing rule-of-thumb is, "Always store a record crop!" Harvest time delivery of record supplies usually pressures futures prices and basis resulting in a very low harvest time price. However, these low prices stimulate demand that begins to consume the large supplies leading to stronger prices as large supplies are used up-a situation that can reward longer term storage. Does this apply to the current corn market?

The markets are providing somewhat mixed signals for corn storage and marketing decisions. USDA projected corn price range is $1.90-$2.30. Current Missouri cash bids are generally within this range. While the possibility of an LDP provides some protection, current prices suggest that there is downside price risk. Distant month futures contracts provide almost enough "carry" to cover on-farm corn storage costs. Capturing this market carry, along with managing income for tax purposes, suggests storing corn into the New Year. However, in contrast to recent years, harvest time basis (difference between cash price and futures price) is stronger (narrower) than average for most locations. This suggests underlying cash strength and may limit basis gains that can be captured with storage. This may point toward a risk management strategy to store corn short-term (until year-end) to capture some post harvest price gains and manage income taxes. Then, in order to minimize risks, sell cash grain and re-own on paper with futures or options to speculate on improved demand, increased exports or 2004 crop concerns that may produce higher long-term prices.

USDA estimates the lowest soybean yield (34 bpa) in ten years and the lowest total production (2.468 billion bushels) since 1996-97. Late season moisture apparently did not allow enable the soybean crop to recover from a poor start and very dry August conditions. USDA projects a decline in soybean use from 2.792 billion bushels in 2002-03 to 2.515 billion bushels in the coming year. These reductions of estimated use leave a carryover of only 130 million bushels-considered by many to be "pipeline" minimum amounts. Supply is very tight and prices will need to ration demand. USDA projects a range of $6.05-$6.95.

While the U.S. supply and demand situation is very bullish, it is important to recognize that the world supply and demand situation is very different. USDA expects a significant increase in Brazilian soybean production and world soybean supplies are projected to increase during the year ahead. Prices are moving sharply higher in order to "ration" the short U.S. crop, but once that happens prices are likely to begin a decline. Domestic soybean crush numbers have held up and this week's exports were more than double trade expectations. Cumulative exports sales are well ahead of last year, but USDA projects exports to be 16.4% lower. It doesn't appear that rationing has begun yet! How high will price need to go to ration the U.S. crop? Most analysts admit they don't know, but most believe they will peak soon-probably before year-end.

The potential for prices to peak early supports another marketing rule-of-thumb, "never store a short crop!" Several market signals appear to be supporting this rule-of-thumb. The soybean futures contract prices are producing an "inverted market" in which nearby futures prices are higher than distant month futures prices. This creates a "negative carry" or a futures market penalty for storing soybeans. In addition basis levels are relatively strong, averaging above the three-year average for most Missouri locations and signaling nearby cash demand for soybeans. The markets are signaling-do not store soybeans! They want the short U.S. soybean crop now. The South American crop can meet needs next spring-so there's no need or return offered for storing soybeans.

What about higher prices needed to ration soybean use? These higher prices are in the process of being "discovered" right now. This suggests the need for only very short-term storage to capture prices that may very well peak before year-end. This market situation requires close attention and being prepared to "pull the trigger" on sales quickly. In order to minimize taxes on sales made prior to year-end; consider January delivery contracts, delayed payments or short hedges.

Bad News/Good News?

The record breaking corn crop and declining price prospects is bad news for most corn producers. However, for those producers who have invested in ethanol plants or other value added enterprises using corn, there is also good news. In September USDA projected new crop corn prices to average $2.30 per bushel. The October USDA reports, in view of record production, lowered these price projections to $2.10.

The 20-cent reduction in expected prices has significant impact on the cost of producing ethanol. Corn accounts for more than 60% of the operating cost for producing ethanol in most farmer-owned ethanol plants. The 20-cent reduction in corn price can lower the cost of producing ethanol by approximately 7-cents per gallon or potentially as much as $2.8 million in operating cost for a 40-million gallon ethanol plant. That's good news, if you're an owner of that plant!

This bad news/good news scenario also points out the need for risk management strategies on both sides of the farm gate. The objective of the value added investments, such as an ethanol plant, is to turn a bad news situation (low corn prices) into a good news situation (higher ethanol profits). However, market risk management can enhance both sides. While the corn producer needs strategies to avoid harvest time price lows, the plant's managers need to be taking steps to "lock in" favorable corn input prices. This could ultimately go beyond bad news/good news into a win-win situation with marketing gains on the farm side and cost protection on the ethanol side.