| September 21, 2007 | Archived Issues |
Storage Strategies
As Missouri's corn harvest approaches the halfway mark and soybean harvest is just beginning, nearby futures prices remain strong. November 2007 soybean futures prices are in an uptrend and at levels (approaching $10) exceeded only about three percent of the time in the last twenty years! Although nearly eighty cents off of earlier highs, corn futures prices in the mid-to-upper $3.00 range are at levels which exceed that less than ten percent of the time in twenty years. Historically, these are good prices and normally a market signal to sell aggressively.
In contrast to strong futures prices, basis is weak. Missouri corn prices range from thirty-five cents to more than sixty-cents under the nearby December 2007 futures price. This is producing local cash prices in the lower one-half to middle of the USDA's 2007-08 projected price range of $2.80 to $3.40. Although soybean basis has improved slightly, Missouri cash prices remain from about fifty-cents to more than one-dollar under the November 2007 futures price. But in spite of this very weak basis, cash prices are still well above the USDA's projected price range of $7.35 to $8.35. Regardless of price, weak basis is a market signal to avoid cash sales. As a result, many producers will likely choose storing the grain over harvest time deliveries or sales.
High futures prices nearly always suggest downside price risk! Storing corn and soybeans without a market plan assumes considerable market risk, especially if "the bin doors are locked" until the New Year. Will futures prices hold up? Will basis recovery generate storage returns? When can selling opportunities be expected? What amount of storage return is reasonable to expect? These and other planning questions should be considered. Then plan market strategies that manage risk and look to capture market gains for grain going into storage.
Storing corn may offer storage profits. The USDA's September Crop Production report forecast that a record corn crop of more than 13.3 billion bushels will be produced this year, an increase over previous estimates. Based on better than expected harvest yield reports, many market analysts anticipate that corn production projections may be increased further in the USDA's October production estimates. Projected record use of nearly 12.8 billion bushels is less than the expected production and carryover is expected to grow to more than 1.6 billion bushels at the end of the marketing year. In spite of what appears to be negative price news from the USDA projections, corn prices have been higher since the reports were issued—a positive market signal!
Carry in the corn futures market (price premiums for distant month futures delivery or storage return offered by futures prices) signals potential storage returns. May 2008 corn futures prices have offered a price premium (or carry) of more than twenty-five cents per bushel over December 2007 futures prices. The July 2008 corn futures contract offers nearly thirty-five cents of carry. In most cases, the deferred month premiums represent "full carry" by more than covering on-farm storage costs. The market carry can be protected, or "locked-in", by using futures hedges or some form of deferred delivery cash contract.
Continued growth in the ethanol industry, strong domestic demand and tight world grain supplies supporting exports will require another large corn crop in 2008. Many analysts expect the market to "bid for acres" with higher prices to insure growing demand needs are met. Actually, this is already occurring with December 2008 corn futures prices more $4 and almost fifty cents per bushel higher than nearby December 2007 futures prices. Market strength following the negative USDA report news suggests the possibility that a futures market price low is in. The corn market is near the top of a forty-five cents trad- ing range that has held for more than two months. An upside breakout of this sideways trading range could produce a significant technical price rally. Closely monitoring corn futures market price action will be important to successful corn storage strategies.
The combination of market strength, weak basis, favorable market carry and continued strong demand suggest opportunities for storing corn. But there are also risks. Lower wheat and/or soybean prices, narrower ethanol margins, production responses by producers worldwide to higher prices, slowing of exports, interest rates and the health of the general economy are just a few of the many fundamental factors that could change an otherwise optimistic price outlook. Negative price action could trigger technically driven selling action by fund traders and significantly lower futures prices. Corn marketing plans should include strategies to capture basis gains and deciding whether to speculate on market trends or protect market carry. Besides strategies to capture higher prices, these plans also should include downside price targets or trap prices to help avoid the risk of a market decline.
In spite of bullish news, soybean storage strategies include risk. The USDA's September supply/demand estimates point to declining ending soybean stocks from 555 million bushels (2006-07) to 215 million bushels (2007-08). The September estimates also reduced production slightly by trimming soybean yields from 41.5 bpa to 41.4 bpa when many analysts were expecting a small increase. There is now concern that, although corn yields appear better than expected, soybean yields may be disappointing and production estimates could shrink further. The market response has been a continuation of counter-seasonal futures price uptrend that began in mid-August. Will the trend continue? Much depends upon the response of South American producers to the current high price levels. Most expect Brazilian soybean plantings to increase, but Argentine farmers may decide to plant more corn as their planting season is approaching. If the uptrend is broken, a significant downside price correction could occur from current price levels.
Soybean market carry is limited and will not recover all storage costs. The price premiums for January 2008 soybean futures (sixteen cents) and March 2008 futures (twentythree cents) will only cover about one-half of the cost of storing soybeans. More distant futures contract months (May, July) offer little or no additional market carry.
It appears that basis gains may be necessary to profit from storing soybeans. Soybean basis has been much weaker than normal in recent months. Large carryover soybean supplies, transportation problems, fuel costs and competition for storage space, along with approaching harvest delivery pressure, are among the explanations for weak basis. However, projections for strong demand and much lower 2007-08 carryover supplies argue for improving basis in the months ahead. A return to more normal basis levels suggests possible returns for delaying sales.
The lower 2007-08 ending stocks estimate points to the need to increase soybean production. After losing acres to corn in 2007, most believe that the soybean market will need to "bid for acres" in 2008. Higher prices for 2007-08 futures contracts suggest this may be occurring, for South American producers anyway, with futures prices for some contracts near $10.00. However, in contrast to higher futures price for the 2008 corn crop, November 2008 soybean futures are discounted (negative carry) about thirty-five cents per bushel compared to the nearby November 2007 futures prices. This hints that higher prices may be needed to attract additional soybean acres in 2008. Keep in mind that bids for 2008 crop soybeans may not improve bids for stored (2007 production) soybeans.
Although soybean storage returns may be possible, it appears more risky than storing corn. In spite of weak basis, current soybean cash bids are well above the top end of the USDA's projected price range. This suggests that, if storage space is limited, storing corn would be favored over storing soybeans. If soybeans are stored, with limited futures market carry, it appears that capturing basis gain is a primary storage objective. Soybean storage strategies should be keyed to watching futures prices closely for signals of a market top and being prepared to capture potential basis gains regardless of when or at what price level these events occur.