After Deciding to Store, What's Next?

Market signals to store 2006 corn and soybean production are relatively straight forward. Historical seasonal price patterns point out that price lows often occur near harvest time and sales should usually be avoided at this time of year. December corn and November soybean 2006 futures prices are near life of contract lows, suggesting prices are following a typical pattern toward seasonal lows. These futures prices also represent prices that are in the lower one-half of USDA’s projected price range for the 2006-07 marketing year and marketing objectives usually include avoiding sales in this portion of the expected price range. At these price levels, protection offered by the LDP or other provisions of the CCC marketing loan program limit the risk of holding grain.

Weak basis is a market signal that discourages cash sales. New crop cash corn bids at many Missouri locations are 30 cents to more than 40 cents under the December futures price with some locations in northwest Missouri more than 50 cents under. Soybean basis is even worse with new crop bids of 50 cents to more than 70 cents under November futures prices at many locations throughout the state. These weak cash bids suggest that the potential for postharvest basis recovery will contribute to storage gains.

Distant month futures contracts offer a carry or storage premium for later delivery. January 2007 soybean futures along with corn and soybean futures contracts for March, May, and beyond offer above average price premiums for deferred delivery.

The combination of seasonal price lows, weak basis, and market carry are strong market signals to store 2006 corn and soybean production. While it may seem like a “no-brainer” to store, what’s next? The historically large carry in the futures market, along with reasonable expectations for basis recovery, would result in profitable storage returns. An effective storage strategy would be to “lock-in” the carry with futures hedges, hedge-to-arrive contracts, etc., and then lift hedges and sell or deliver on the hedge-to-arrive contracts when basis strengthens. This strategy reduces risk and captures the storage profits the market is offering. Will the market offer more? The LDP provides some downside price protection and arguments can be made for higher price potential. If storing for higher prices, what are reasonable price objectives or what will it take to attract the grain out of storage? Marketing plans for speculative storing of corn and soybeans should consider these and other questions carefully to plan for selling strategies that capture profits rather than just blindly "storing and hoping" that prices will be higher when the grain is sold.

Corn: USDA’s September 12, 2006 supply/demand and crop production reports projected the 2nd highest corn yield (154.7 bpa) and the 2nd largest corn crop on record. This large corn crop is following the 3rd largest crop (2005) and the record crop (2004). Although supplies are large following three big production years, anticipated corn use of 11.915 billion bushels will exceed expected production of 11.114 billion bushels. Rapid growth in ethanol production is expected to use an additional 550 million bushels in the coming year and tighter world corn supplies are expected to contribute to a 100 million bushels increase in exports over this past year’s strong export performance. Large beginning stocks of corn (2.012 billion bushels) appear to provide adequate supplies for the coming year, but the strong demand is projected to trim 2006-07 carryover by about 40% and ethanol demand growth is expected to continue in the years ahead. This raises the question about corn supplies beyond 2007 with more corn acres needed to meet future corn demand needs. Some market analysts expect corn prices to move significantly higher over the next several months to attract more planted acres in 2007.

Storing corn is one method of speculating on higher prices that many are expecting as the market adjusts to the need for increased 2007 production and begins to “bid for acres” planted to corn. Another alternative is to capture basis and some of the market carry gains with stored corn during a post harvest price recovery and then use futures or option positions to speculate on a demand driven corn price rally. There are a variety of ways either of these strategies could be accomplished, but it is important to understand that the timing of price rallies does not always coincide with cash flow needs and recognize market risks. Although corn demand is strong and supplies are beginning to tighten, 2006-07 supplies are more than adequate. Increasing 2006 corn production estimates that add to current supplies, any slowing of export demand, continued price declines in energy markets, and negative price action in other commodities are among the factors that could delay or limit corn price rallies and add risk to storing. If storing corn to speculate on higher prices, it will be important to keep current with changing market factors and adjust sales objectives accordingly to insure storage profits are captured.

Soybean: Considerable risk is involved with speculative storage of soybeans. USDA’s estimates include the 3rd highest soybean yields (41.8 bpa) producing the 2nd largest soybean crop. This large soybean crop follows the 3rd largest soybean crop (2005) and the record crop of 2004. Soybean demand is strong, but production (3.093 billion bushels) is expected to exceed use (3.051 billion bushels) and 2006-07 ending stocks are expected to increase to a record 530 million bushels. World soybean carryover supplies also are expected to be at record levels, which coupled with the large U.S. supply suggests considerable risk in storing soybeans to speculate on higher prices. Increasing use of soybean oil for biodiesel, concerns about 2007 South American production, price strength in other grains, and “bidding for 2007 acres” are among the factors that could support soybean prices, but large supplies are likely to limit gains. While the market loan or LDP provides downside price protection at current price levels, the primary marketing objective for storing soybeans appears to be choosing strategies that capture market carry and basis gains rather than the expectation of significantly higher prices.

Plant Wheat?

Increasing use of corn for production of ethanol dominates most grain marketing outlook discussions. Many analysts speculate on the increase in corn prices needed to take acres away from soybean and other crops. What about wheat, will corn prices bid acres away from wheat production in 2007?

It’s easy to make an argument that corn acres should replace soft red wheat acres in the Corn Belt. Although U.S. and world supplies of all wheat are growing tighter, U.S. soft red wheat carryovers have nearly doubled in the last five years. Missouri’s wheat basis remains weak with cash bids of 70 cents to more than one-dollar under the futures price at grain elevators across the state. Large supplies and weak cash bids would be expected to discourage wheat planting, but maybe not.

In spite of the large soft red winter wheat supplies and weak basis, the current July 2007 Chicago Board of Trade soft red winter wheat futures prices appear to be outbidding corn for acres! Assuming typical yields and production costs for Missouri, July wheat futures prices in excess of $4.00 compared with December corn futures of less than $3.00 suggest that (even with weak basis) wheat could be a more profitable cropping alternative! Potential crop profits may be even greater if wheat is followed by double crop soybean production. Although many market analysts expect the corn market to “bid for acres,” that doesn’t seem to be the case right now for Missouri producers.

This perhaps unexpected price relationship does, however, suggest that if wheat is planted the market is offering a marketing opportunity. However, it is important to understand that this opportunity may be temporary. Soft red wheat supplies are large and wheat futures prices are have been above $4.00 only about 20% of the time during the past 20 years. The decision to plant wheat also should consider including forward pricing with cash contracts or hedges to protect the potential profits the wheat market is currently offering.