Market Signals to Store

The September 12, 2005 USDA World Agriculture Supply and Demand Estimates provided some production surprises. Corn and soybean production estimates exceeded average pre-report trade estimates and corn production projections were even above the top end of the range of trade estimates. In spite of drought conditions in the heart of the Corn Belt, the estimated 10.639 billion bushels corn crop is expected to be the second largest ever. The soybean crop is projected to be the third largest with production estimated at 2.856 billion bushels. 2005-06 corn carryover is expected to remain burdensome, exceeding 2 billion bushels, and soybean ending stocks estimates rose to a more than adequate 205 million bushels. Increasing supplies are negative news for prices and USDA's corn price projections were cut 10 cents, now expected to range from $1.70 to $2.10 per bushel. Average soybean price estimates were reduced about 40 cents with an expected range of $5.15 to $6.05 per bushel.

Market price reactions to the report estimates were negative resulting in lower prices. December corn futures gapped lower, continuing a chart downtrend and points to $2.00 or lower technical price objectives. Soybean prices also continued downtrends, which suggest the potential to test chart support or contract lows in the lower $5 range.

Cash prices are even lower. Basis (spread between futures and cash prices) typically weakens (cash price discounted to futures price) as harvest approaches because cash deliveries usually exceed cash demand at harvest time. Large old crop corn carryover, anticipation of harvest, low water levels on the Mississippi River, and other transportation problems had already begun contributing to weaker basis for corn and soybeans. Hurricane Katrina added to the transportation woes causing delays and backup at the Mississippi Gulf, leading to a much weaker than normal basis and much lower cash prices. Unless a large end user is located nearby, most Missouri locations have cash bids reflecting a corn basis that is 10 to 30 cents weaker than usual and soybean basis is 10 to 40 cents weaker than normal. Basis at Mississippi River elevators has been weaker by 50 cents or more compared with the average basis of recent years. The weak basis coupled with the downtrend in futures prices results in discouraging cash prices, especially for those with drought reduced production.

In spite of discouraging prices, market signals suggest strategies to capture potential storage opportunities. Basis and market carry (price premiums for distant month futures contracts) provide sell or store market signals for making harvest time marketing decisions. Although prices may never fully recover revenue losses due to drought-reduced production, paying attention to market signals may allow producers a chance to position themselves to take advantage of potential market opportunities.

Weak basis can be interpreted as a market signal that discourages the cash delivery of grain. Typically basis is weak at harvest time and then recovers following the completion of harvest sales and deliveries of grain. In recent years, post-harvest corn basis strengthening of 15 to 20 cents and soybean basis gains of 10 to 25 cents have occurred throughout Missouri. If shipping bottle-necks at the Gulf and other transportation problems improve, a more dramatic recovery from the current very weak basis may offer potential for greater storage gains as basis strengthens and returns toward more normal levels.

Market carry represents current futures price offers for holding grain for delivery in deferred months, another market signal to help decide whether to sell or store grain. March 2006 corn futures prices have recently offered premiums of about 12 cents more than the December 2005 contract and July corn futures have offered premiums approaching 25 cents. Soybean futures are also offering market carry with a March 2006 futures price premium of 16 cents over the November 2005 contract. These premiums for the deferred contracts represent what the current futures market is offering to store corn and soybean for later delivery when those contracts become the nearby month futures contract.

Storing of grain is necessary to capture the market carry and potential basis gains. It is important to understand that, although market carry and basis suggest storage returns, the gains are not necessarily assured. Market carry can be hedged (locked-in) by selling the distant month futures against stored grain. However, capturing basis gains requires speculating on the relatively predictable average basis pattern and a return to more normal basis levels as transportation problems/cash demand improves.

While price levels are discouraging, market carry and potential basis gains appear to be offering returns well above storage costs for corn and soybeans. Depending upon local cash bids, interest and storage costs for storing corn into January-February are about 12 to 20 cents per bushel in commercial storage and 9 to 12 cents using on-farm storage. Market carry of about 12 cents plus basis potential of 15 cents or more will exceed these storage costs. Soybean storage costs are about 19 to 25 cents per bushel for the same period. With market carry of about 16 cents and possible basis gains of 10 to 20 cents or more, soybean storage returns are also indicated. Note: A Grain Store/Sell Decision Aid is now available at the FAPRI website (http://www.fapri.missouri.edu/) that can be used to estimate storage costs and calculate projected storage break-even prices for up to 12 months compared with current cash bids.

Weak basis also may provide speculative opportunities to enhance corn prices using the LDP. Low cash corn prices are resulting in LDP (loan deficiency payment) availability for corn. Since the LDP is tied to cash prices, the weak basis is contributing to a larger LDP. In some locations the PCP (posted county price-used to calculate the LDP) is lower than the posted cash bids and can produce net cash sales prices that are above county CCC loan price. Those storing corn may look to capture the LDP near price lows and possibly capture additional speculative returns for corn, since later basis strength could increase cash prices dramatically and reduce the potential LDP. The objective of this strategy is to capture a large LDP early and sell later at higher prices. The unusually weak basis, at many locations, suggests that this may offer an opportunity for speculative gain, but understand that capturing the LDP and storing the corn does remove the price protection offered by the LDP.