How High Is High?

The markets are offering favorable prices. That may be an understatement, particularly, for corn and wheat prices. Corn prices are unusually high, especially for this time of year, with December 2006 corn futures prices above $3.10. Nearby corn futures prices above $3.00 occur about 10% of the time and $3.00 plus prices during the month of October have only occurred three times in short crop production years (1974, 1980, and 1995). This is not a short crop year. Three dollar plus prices are being offered for the third largest corn production ever! December 2007 (next year’s crop) corn futures prices are also well above $3.00.

November 2006 soybean futures prices are more than $6.00. These appear to be good prices, since supplies are large and nearby soybean futures prices are less than $6.00 almost 60% of the time. November 2007 soybean futures prices are more than $6.50.

Wheat futures prices at more than $5.00 are the highest in ten years. In fact, nearby CBOT wheat prices have been more than $5.00 only four times before in 1973, 1974, 1980, and 1996.

A marketing rule-of-thumb, often used by marketing advisors, is to "sell aggressively when prices are in the upper one-third of their historical price ranges!" Corn and wheat prices are obviously there and soybean prices are almost there. However, many marketing advisors are going relatively slow in recommending sales. A quick review of three popular market advisory service newsletters reveals recommended sales of 30% to 50% for 2006 corn and soybean production. In spite of prices well over $3.00, sales recommendations for next year’s (2007) corn production range from zero to 20% of expected production. No soybean sales have been recommended for 2007 production. Although July 2007 wheat futures are offering harvest time futures prices that have occurred only once in the last 20 years, wheat sales recommendations have been limited to 10% to 35% of expected production. In view of the historically high corn and wheat prices, these are not aggressive sales recommendations. Obviously, these advisors must expect higher prices.

Corn supplies are growing tighter. While USDA’s October supply/demand report projects the third largest corn crop in history, the production estimate of 10.9 billion bushels is down from the previous estimate of 11.1 billion bushels. Feed use is expected to remain stable, ethanol use is growing rapidly, and tightening world supplies suggests strength in export demand. The resulting total expected use of 11.9 billion bushels exceeds the production estimate and is projected to decrease ending stocks to less than 1.0 billion bushels. USDA estimates 2006-07 corn prices to range from $2.40 to $2.80. Data Transmission Network’s (DTN) current national corn index (NCI) price as of October 18, 2006, based on December 2006 futures price, indicates a national average cash price of $2.83. This suggests that current corn prices have responded to tightening supplies and are at the top of USDA’s projected price range!

More corn acres will be needed in 2007. The tightening supplies, expected expansion of ethanol plants under construction along with other corn demand will require added production to insure adequate corn supplies in the coming year meets demand needs. This leads many analysts to believe that corn prices need to increase in order to attract more acres away from other crops. However, it may not be easy to get more corn acres away from soybean or wheat planted acreages.

Soybean supply/demand projections appear to be negative, but will there be significant acreage cuts? In spite of record demand, production is expected to result in record high 2006- 07 soybean ending stocks of 555 million bushels. World ending stocks also are projected to be a record. However, most understand that reduced 2007 production from fewer acres, along with continued strong demand, could quickly begin to tighten soybean supplies just as biodiesel production is beginning to increase. This, coupled with production uncertainty in South America, is likely to provide support to soybean prices. The USDA projects 2006-07 soybean prices to range from $4.90 to $5.90. The current national soybean index (NSI) average cash price is $5.51, which is in the upper one-half of USDA’s projected range. This suggests somewhat higher prices may be possible. If soybean prices remain at current or higher levels, lower soybean costs of production compared with the higher costs of producing corn may limit acreage shifts away from soybean production.

The wheat market might have the greatest risk with high prices attracting wheat acres. Poor production in hard red winter (HRW) and hard red spring (HRS) wheat producing areas has tightened U.S. wheat supplies to the lowest level in more than ten years. Additionally, world wheat ending stocks are projected to be the lowest in 25 years. These factors have provided some of the bullish news that has sent wheat prices skyrocketing. USDA projects 2006-07 wheat prices to range from $4.10 to $4.60. DTN’s national soft red winter (SRW) wheat index shows national average SRW wheat cash prices at $4.25, near the middle of the expected price range for all wheat. Wheat is grown all over the world and producers in other countries, as well as in the U.S., can be expected to respond to high prices with increased wheat acreages. Increased production prospects for 2007 could lead to lower prices.

While SRW wheat futures prices (traded on the Chicago Board of Trade) are at high levels, the supply/demand situation for SRW wheat is not as bullish as it is for other wheat classes. HRW and HRS wheat ending stocks have trended downward in recent years and are at low carryover levels. But good SRW wheat production has led to increasing supplies of this class of wheat and partially explains the weak cash basis experienced in recent months. In spite of this weak basis, current July 2007 SRW wheat futures prices have offered plenty of incentives for producers to increase SRW wheat acreage in 2007 and competition for acres that could be planted to corn. For many Missouri producers, SRW wheat followed by double crop soybeans appears to offer greater returns than corn production even with corn prices more than $3.00.

Although prices are already high for this time of year, corn, soybean, and wheat futures prices are in sharp uptrends. These uptrends, until broken, point toward higher prices. That helps explain why some market advisors are reluctant to be aggressively making sales. Will corn and wheat prices challenge record highs in the coming months? While some believe it could happen, no one really knows. Remember, the function of the market is to allocate supply and demand. Prices need to reach levels that both encourage production and ration demand. Once that occurs, prices are likely to slip lower.

In recent days, some analysts have pointed out that the wheat market appears “toppy” and may soon set or already have established a high. Although the arguments remain for further price strength, producer response to high prices with increased wheat plantings and rationing of use with high prices will likely turn prices downward at some point. At current price levels, making or adding to pre-harvest new crop wheat sales appears to be a sensible risk management strategy. Breaking of the uptrend line in prices would suggest aggressive selling.

Whether it is old crop corn and soybeans in storage or early pre-harvest sales for 2007 production, to make selling decisions in these volatile markets with steep uptrends is difficult. On the demand side, the increasing demand for biofuels suggests the potential for long term bull markets. It may be alright to delay sales when prices are in an uptrend, but don’t let $3.00 plus corn or more than $6.00 soybean prices slip away if the market trend reverses. Market strategies based on higher price expectations should include plans to capture profitable prices if or when prices turn lower. Many analysts expect corn and soybean prices to continue higher, but prices can be expected to correct with potentially sharply lower prices on some days. It is important to understand that sharp price corrections can trigger planned sales targets even if the uptrends remain intact. This situation often causes a reluctance to make sales that can lead to much lower prices received if the trend is really broken and prices continue to decline. While this risk cannot be completely avoided and disciplined plans that spread sales may not capture the price high, the primary objective is to take advantage of rare profit opportunities.

Tightening supplies, strong demand, and "bidding for acres" are resulting in high prices that did not seem possible just a few months ago. These factors suggest that prices have strong support and present a favorable outlook for profitable prices. Although challenging previous price highs is not out of the question, how much higher will prices go is difficult to predict. Bull markets have historically reversed unexpectedly while almost everyone was anticipating further upside price moves. Having a marketing plan, following the markets closely, and being prepared to react quickly are the keys to success regardless of how high prices go.