"Holy Toledo"

"Huge, gigantic, record shattering, exceeded all expectations, bin busting, stunning, amazing, shocking, astounding, unbelievable, and wow are examples of words market analysts used to describe record production estimates in USDA's October 12 supply/demand reports. Total corn production (11.613 billion bushels) and soybean production (3.107 billion bushels) represent new records. USDA projects a record corn yield of 158.4 bpa, 16.2 bpa higher than the previous record of 142.2 bpa set only last year. After lower soybean yield/production estimates in the September reports, USDA increased the projection in October and is now forecasting record soybean yields of 42 bpa, finally breaking the 10 year old previous record of 41.4 bpa. The trade was expecting big crops, but not this big. One market analyst summed it up by saying, "Holy Toledo!"

Record production coupled with increasing ending stocks nearly always means lower prices. In spite of anticipated record corn use (10.895 billion bushels) and strong soybean use (2.82 billion bushels), production is expected to exceed use. As a result, ending stocks are expected to increase significantly. Corn ending stocks are projected to swell from 958 million bushels (2003/04) to nearly 1.7 billion bushels. Soybean ending stocks are expected to increase from a very tight 112 million bushels (2003/04) to 405 million bushels-the most since 1986/87. World supply/demand factors don't offer much encouragement either. While world corn and coarse grain supplies are historically tight, increased world grain production and feed competition from low quality wheat are expected to contribute to increased ending world grain stocks. In spite of strong world soybean demand, record U.S. production and anticipated increases in South American production is expected to result in record high world ending soybean stocks.

Corn prices initially reacted sharply lower following the reports release, but recovered and closed near the high end of the day's trading. This suggests that, while initially shocked by the record production numbers, the markets had already "built in" expectations of a large crop. USDA's projected mid-point 2004/05 average corn price is $1.95 (range $1.75-$2.15), well below 2003/04's $2.42 average price. Futures prices appear to be offering prices within the projected price range. Assuming normal basis patterns, December corn futures prices result in cash prices near the lower end of the projected range. The carry offered by distant month futures contracts also produces prices within the projected range, illustrated by July '05 futures prices that suggest cash price potential near the upper end of the range. If realized, the $1.95 average price would trigger the maximum government program counter cyclical payment (CCP). Additionally, current cash prices are at or below the low end of the price range, triggering loan deficiency payments (LDP). Whether corn prices have established a "harvest low" should be determined in the next few weeks as harvest progresses past mid-point.

However, without weather problems in 2005 or the emergence of unexpected demand, significantly higher corn prices do not seem likely.

Soybean yield estimates represent a dramatic turn around from previous estimates. With projections for record production, the market reacted with sharply lower soybean prices following the reports. USDA projects a price range of $4.70-$5.50 and a mid-point average of $5.10. With these price levels, it appears that a CCP will be available and LDPs of more than 30¢ have been triggered. However, even with sharply lower prices, current nearby and distant month futures prices still result in prices near the middle of the projected price range. This, along with the projected burdensome domestic and world supplies, suggests the potential for lower soybean prices at some point.

Strategies for Stored Grain

Producer's first concern is getting the corn and soybean crops harvested and delivered or stored someplace. Once this is accomplished, attention needs to turn to how to market the stored grain. Most would also agree that marketing objectives should include obtaining returns to storage by selling at higher prices and perhaps managing income for tax purposes.

While higher prices can be captured in either the cash or futures market, it is important to remember that the primary marketing objective of storing grain is to capture basis gains and market carry. Briefly, basis is the spread between cash price and nearby futures price. Following harvest, this spread often narrows as cash prices "gain" on futures price. These gains can only be captured by holding the cash commodity when the spread is wide and selling it in the cash market when the spread narrows. Market carry is the price premium distant (or deferred) month futures contacts offer above the nearby futures contract. It represents a futures market "storage premium" for holding or carrying the grain until the distant month. Producers can capture the "carry" by holding the cash grain and contracting to deliver or sell in the deferred month futures.

Although corn and soybean prices have declined into harvest time, the markets are offering potential storage returns or the opportunity to capture basis gains and market carry. Several Missouri elevator locations are offering price premiums for January delivered corn and soybeans. For example, one central Missouri elevator quoted a spot corn bid of $1.68 (10-14-2004). The same elevator also offered a January corn quote of $1.94 for a potential storage return of 26¢ per bushel. The March '05 corn futures contract has offered a premium or carry of about 8-10¢ above the December '04 contract. In this case, the elevator's January bid captures the 8-10¢ carry and 16-18¢ of expected basis gain. Contracting stored corn for January delivery at that elevator would "lock-in" the gain and more than cover storage costs, offering a positive return on the stored corn. Several other elevators located throughout Missouri offered similar premiums for January delivery of both corn and soybeans.

While large crops, along with growing domestic and world ending stocks, may limit price gains; the January bids offer a sales opportunity to get storage returns. For those still optimistic about higher prices, making January cash sales and re-owning with futures or call options could be a less risky strategy than speculating with stored grain. Another alternative would be to sell the cash grain and use a bull-call option spread (buying at-the-money calls and selling out-of-the-money calls) to re-own the grain with a net premium cost less than the cost of storing into late spring or early summer.