| October 16, 2009 | Archived Issues |
Market Impact of Harvest Delays
The USDA’s October supply and demand estimates projected the second largest corn crop and record 2009 soybean production. Record use is also expected for both crops. Increasing ethanol production and tight World coarse grain supplies are expected to increase corn industrial use and exports. In spite of “red ink” for many livestock producers, increases in expected corn feed use is partially offset by reductions in feeding of wheat and other feed grains. Expected 2009-10 corn ending stocks are essentially unchanged from the past year at 1.672 billion bushels. Anticipated increases in domestic soybean crush and continued strong exports, primarily to China, support the expected increases in 2009-10 soybean use. With strong demand, the expected record size soybean crop only allows soybean ending stock to rise less than 100 million bushels from last year’s tight carryover (138 million bushels) to 230 million bushels.
The USDA’s 2009-10 corn price forecast remains unchanged from the previous estimate at $3.05 to $3.65. Forecast soybean prices were reduced ten cents and now expected to range from $8.00 to $10.00.
Production could be less than forecast, especially for corn. Freezing temperatures have brought an end to the growing season in several states where more than one-third of the corn has not reached maturity. The cool and wet growing season has also led to lower test weights and poor stalk quality in many areas that will reduce yields and add to harvest losses. This week’s USDA Crop Progress Report indicated corn harvest progress well below average at only 13% complete nationwide. Although some producers have reported very good yields, others say poor test weights have caused lower than expected yields. The slow harvest progress, along with potential for harvest losses and some disappointing yields leads some analysts to believe that corn production will be less than the current USDA projection. These factors have added support to a counter-seasonal price rally in corn futures prices that began in September. The slow harvest progress has also reduced the normal seasonal harvest time pressure on grain elevators and contributed to a stronger basis than in recent years at most Missouri locations.
The slow harvest pace has also supported a price rally in soybean futures prices that began earlier this month. This week’s progress report showed soybeans at only 23% harvested. This is well below the average pace of 57% of soybeans harvested at this time of year. Early harvested yields appear good, but continued delays, along with rain or snow, increase the potential for production losses. Strong demand and the slow harvest pace has supported strong soybean basis for cash prices n Missouri, especially for locations along the Mississippi river that serve export markets.
Market signals are generally unchanged from last month. But the futures price uptrends and basis strength may be offering some cash pricing opportunities. Depending upon location, Missouri cash bids have generally been in the upper one-half to above the top end of the USDA forecast price ranges for corn and soybeans. Since there is downside futures price risk at these price levels and a risk of weaker basis as harvest progress improves, current cash bids should not be ignored.
The corn market continues to signal storage returns. The December ’09 to May ’10 corn futures price spread or market carry remains near twenty-cents per bushel. This offers storage returns that when coupled with any basis gain could cover storage costs for early spring corn deliveries. This makes storing corn appear to have profit potential, especially if US total crop production ends up less than the current USDA estimates. But price unprotected storage carries considerable risk if harvest progress improves and production ends up near the USDA’s estimates.
The current corn price rally has offered a return to profitable prices for most producers, unless yields are particularly disappointing. Recently, Missouri cash bids across the state have ranged from near $3.35 in the northwest to highs near $3.80 in the southeast. This suggests making sales for corn that needs to be delivered as it is harvested. A more risky, but potentially more profitable strategy would be to delay sales until a clear market signal is given that the current price rally has peaked. This would require watching the market closely, being prepared to act quickly and understanding the risks of rapidly falling prices and weakening of basis. For corn going into storage, consideration should be given to contracting for spring delivery a portion of the stored corn to lock-in storage returns and profitable prices. If the basis weakens with harvest progress, an alternative strategy would be to use hedge-to-arrive contracts to protect prices and attempt to capture post-harvest basis gains.
Soybean futures prices continue to discourage storing soybeans. While somewhat improved from last month, the November ’09 to March ’10 soybean futures market carry is only about seven cents per bushel. The current stronger than recent average basis suggests limited basis gain potential with storage. The combination of weak carry and limited basis potential offers little in the way of potential storage returns. If cash soybeans are stored, it continues to be primarily speculation on higher futures prices!
The recent soybean futures price rally and basis strength has offered cash soybean prices in the upper one-half to above the USDA forecast price range with cash bids near $9.30 to more than $10.00 at locations across Missouri. These are profitable prices for nearly all producers and there are a variety of ways to capture them. A cash delivery sales contract would lock in both basis and futures price resulting in a profitable sale when harvest resumes and delivery can be made. As noted above in the corn discussion, a possibly more profitable, but more risky, strategy is to wait for signs that the current rally is peaking. Then make contract sales. However, this strategy would require more precise timing to implement successfully. A somewhat less risky alternative would be using a basis contract to lock-in a relatively strong basis while waiting to see if the current futures price trend continues.
For those who continue to expect much higher soybean prices and want to store to capture higher prices, understand the risks. There is limited carry in the soybean futures prices, which is a strong demand signal that the market wants soybeans now. However, although limited, there is somewhat more carry in the market than last month. This could be interpreted as a signal that demand is beginning to weaken. This could be an early signal that the market will begin to anticipate a large crop in South America that will provide export competition with less demand for US soybeans. While higher prices could occur, there is significant risk in storing soybeans into the spring of 2010.There is an alternative strategy to storing soybeans that might work better this year than in most years if futures prices do increase into spring. With a lack of market carry and relatively strong basis that limit normal storage gains, making sales and then re-owning those sales with futures or call options may offer a less risky alternative to storing soybeans and allow continued speculation on higher prices. Remember, the risk of lower prices and speculative losses with this strategy or the alternative of storing soybeans is significant!