 "It is widely anticipated that corn and soybean prices will
reach a peak early, sometime in a relatively wide window around
harvest time, and then decline as the marketing year
progresses," Good said. "The anticipated pattern is generally
described by the adage that ‘short crops have long tails.' At
this juncture of the 2012 season, it appears likely that the
corn and soybean price pattern will follow a more or less
typical short crop price pattern, at least in terms of the
timing of the price peak.
"Based on historical patterns, however, the timing of the
price peak could range from the current month until after
harvest. With an early harvest, a price peak by September seems
most likely, assuming that prices go high enough to slow the
pace of consumption sufficiently. Prices are probably not yet
high enough for either crop to accomplish that objective," Good
said.
According to Good, for both corn and soybeans there is
considerable risk that the U.S. average yield will be lower than
now anticipated. For soybeans, demand is also very strong due to
the shortfall in the 2012 South American crop and ongoing large
purchases of U.S. soybeans by China.
Good explained that for producers with substantial quantities
of 2012 crop corn and soybeans to sell, the window for the best
price opportunities may be open for a while, but it is not
possible to predict the timing and magnitude of the price peak.
A strategy of spreading sales over the next several weeks may be
prudent. For producers with little or no crop to sell, the major
focus may be on maximizing crop insurance payments.
For those with insurance products that include a harvest
(October) price guarantee, Good said there may be concern that
the price peak will come and go before October.
"In that case, some are considering hedging the insurance
payment on their production shortfall by selling futures
contracts at prices higher than expected to exist in October,"
he said. "There are obvious risks with that strategy because
prices above the selling price would result in margin payments
and forgone income. Those who are considering hedging insurance
payments may also want to consider an averaging strategy and/or
the use of options to manage the risk."
[to top of second column] |
Good explained more about the logic of this expected price
pattern. He said it is based on three tenets. First, prices need
to move sharply higher in a relatively short time frame so that
consumption becomes unprofitable to some end users and the
overall pace of consumption is reduced to be in line with
expected supplies. Second, a short crop is expected to be
followed by much larger production in the following year as
weather conditions return to normal and producers respond to the
incentives of high prices. Third, once prices peak and start to
move lower, an extended period of declining prices is required
to rebuild the pace of consumption to the level of subsequent
production. The timing and magnitude of the price peak and the
speed and magnitude of the subsequent price decline are
determined by the magnitude of the production shortfall, the
timing of the recognition of the shortfall, the strength of
demand for the crops and the production response (domestic and
foreign) in the following year.
"There isn't a universally accepted definition of a short crop, but
it is generally defined in terms of a U.S. average yield that falls
below trend value by some threshold double-digit percentage," Good
said.
For corn, there have been 10 other years since 1970 in which the
crop could be classified as short: 1970, 1974, 1980, 1983, 1988,
1991, 1993, 1995, 2002 and 2011. The price pattern in those years
generally followed the expected pattern described earlier but with
some exceptions, Good said. In particular, the timing of the price
peak varied considerably in those years.
The price peak occurred early in six of those years -- 1970,
1974, 1980, 1983, 1988 and 2002 -- but ranged in timing from June to
November. Prices did not peak in the same month in any two of those
six years. In addition, the price peak occurred in January following
the 1993 harvest and in July following the 1995 harvest. For the
1991 and 2011 crops, the price peaked in August, before harvest, and
again later in the marketing year.
For soybeans, eight previous years might be described as short
crop years: 1974, 1976, 1980, 1983, 1984, 1988, 1993 and 2003. As
with corn, the timing of the price peak varied in those years.
Prices peaked early, ranging from June to November, in five years;
had a double peak in 1993-94, in the July before the harvest and the
June after harvest; peaked in April following the 1976 harvest; and
peaked in March following the 2003 harvest.
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences] |
