A variety of market proverbs or sayings often are used to describe various price actions and market responses. One of these sayings, "Buy the rumor and sell the fact," appears to describe market response to the September 12 USDA Supply and Demand report. Prior to the release of the report, the grain trade anticipated small cuts in corn production and a small increase in soybean production compared to the August production estimates. Most believed that rains came too late to help corn yields. Soybean yield prospects, while improvement was expected, continued to be disappointing in many areas of the Corn Belt. The average guess was 8.829 billion bushels of corn production (range 8.7 to 8.9) and 2,672 billion bushels of soybeans (range 2.6 to 2.7). Based in part on these expectations, November soybeans and December corn futures contracts set new contract high prices during the three-day period prior to the USDA reports. The market responded to news (bought the rumor) of continued poor crop conditions and limited yield response to spotty August rains. The September 12 USDA reports contained no surprises. Corn and soybean production estimates were within the expected ranges and near pre-report average trade guesses. Corn production was estimated at 8.849 billion bushels, slightly above the average trade guess of 8.827. Estimated soybean production of 2.656 billion bushels was just below the average 2.672 of pre-report trade guesses. The report confirmed market expectations (rumors) that already were "bid" into prices. Corn and soybean prices responded by closing lower the next two trading days-the markets "sold the fact!" Market prices don't go up in a straight line. Many analysts agreed that the markets were overdue for a correction and the lack of "new" information in the reports allowed the markets to correct. It also may illustrate another market adage, "bull markets needs to be fed new information, and bear markets need no news at all!" Without new information, prices often tend to drift lower. Additionally, harvest deliveries or better than expected yields likely will pressure prices as harvest progresses. However, many analysts believe there is strong market support due to the tight supply situation. Market attention will focus on harvest reports for clues on final production and how users react to higher prices-what price does it take to ration tighter supplies? Regardless of the lack of news in USDA reports and price action following their release, USDA still shows reduced production, tighter supplies and projecting average prices well above recent years. New Crop Corn and Soybeans-Sell or Store? Corn harvest is well underway throughout much of the state and soybeans are maturing rapidly. As crops are harvested, should you "sell or store?" Depending upon your actual yields and financial position, one or more of the following may determine your final decision: cash-flow needs, capturing harvest time price strength, obtaining storage returns, expectations for higher prices and income tax management. Cash needs: Harvest time sales generate cash for operating debt repayment, scheduled principal and interest payments, harvest expenses and other year-end business expenses (property taxes, etc.). Cash sales may be even more important this year since, at current prices, there will be no LDP (loan deficiency payments) that can be claimed to provide cash as in recent years. Additionally, there may be little or no counter cyclical payment (CCP) under the new farm legislation if prices remain strong and program sign-up could delay any CCP that may be available. The need for cash may make harvest sales necessary for some. Harvest time price strength: Not only do harvest sales provide needed cash, they may capture some of the higher prices. Currently, prices are much higher than in recent years due to drought-shortened crops. Many analysts point out that prices for short crops often peak at or near harvest. The fact that new crop corn and soybean futures contracts made new life-of-contract highs, prior to the September USDA reports, appears to support this theory. Even if prices go higher, harvest sales should at least capture some of the highest prices of the past year. Capture storage returns: In recent low-price years, storing grain to capture storage returns from market carry and basis was an important strategy, since the market offered little in the way of higher prices. However, this year the potential for these storage returns appears limited. Market carry (spread between nearby and distant month futures) is very narrow for soybeans and wouldn't begin to recover storage costs. For corn, the carry also is too small to cover all storage costs. As harvest begins, corn and soybean basis is stronger than in recent years. This suggests less potential basis gain to be captured by storage, however, this could change if basis weakens as harvest progresses. For now, both the cash (basis) and futures (carry) markets are signaling the need for grain and discouraging storage. The only argument for storage may be to capture higher price levels into winter or next year. Higher prices: Prices are volatile and difficult to predict. While short crop prices may peak near harvest time, there are plenty of arguments for higher prices into next year. Lower production and strong demand are expected to result in the second lowest ending stocks/use ratios in more than twenty years for 2002-03 corn and soybeans. Technically, as harvest is beginning, both corn and soybean markets continue to be in price uptrends. Fundamentally, the market will now focus on yield reports and worries that final production numbers could be lower than USDA's September estimates, along with whether higher prices will slow demand. Some analysts believe that prices need to go higher in order to ration use and meet lower USDA demand projections for the coming year. However, weak market carry may contradict some of this and suggest that the market expects South America (especially for soybeans) to meet next summer's world needs. In any case, storing grain for higher prices is speculation and speculating on higher prices may be accomplished without storage risks/costs by using the futures markets. Taxes: Income tax management, especially cash basis income, impacts late year selling decisions. Many producers probably have carried over and sold much of their 2001 crop in the current year (2002). Selling a significant portion of the 2002 crops in the same year will "double up" cash income and increase tax liability. For those with short crops, this situation could create a dilemma by producing a high cash income year in what actually is a low net income year due to less production and lower year end inventories. It would create a tax liability due next spring when there was no inventory to sell and provide cash for paying the tax bill! However, delaying sales for tax purposes limits cash availability this fall and incurs storage costs along with risking lower prices- a "Catch 22" situation for those with short crops. For others, the tax savings by storing might offset some the market risk and storage costs. The decision whether to sell or store grain continues to be a complex one. There are advantages and disadvantages to each that must be sorted as to which is most important to your situation. Other marketing tools, used in combination with cash sales or storage, may help. For example, a delayed pricing contract may help manage taxes while allowing you to move cash grain, re-owning cash sales with futures/options could enable capturing higher futures prices or purchasing put options might protect "price floors" for grain in storage. Current harvest prices are much better than in recent years, but marketing skills and using the appropriate tools still are important-especially if your yields are low. Storage may be useful to manage cash flows and taxable income along with the possibility of capturing higher prices. However, weak market carry and limited prospects for basis gains suggests that, if you choose to store, it should be a short-term strategy and buying futures or call options is a better longer term strategy than speculating on higher prices with cash grain. |