are not market solutions to offset these uncertainties created by
the mechanism of payments under the current farm program," said
Chris Hurt. "Here are three strategies that producers might ponder.
producers will strive to do their best job of pricing their corn and
soybeans with no follow-up strategy to attempt to outguess the
"A second strategy
would be to diversify pricing throughout the marketing year, so that
an individual's price received would be reasonably close to the
season average in their area.
"Finally, those who
price substantial portions of their crops around harvest or early in
the marketing year could follow up by buying futures or call options
on a portion of their crop sales."
The difficulty in the
last option, Hurt added, is that rising futures may reasonably
protect losses of countercyclical payments, but falling futures
cannot be offset in gains of countercyclical prices beyond their
He noted that other
option strategies such as vertical call spreads could also be used,
but each strategy has its complications.
"Therefore, those who
alter their pricing strategy to use futures and options to attempt
to protect countercyclical payments clearly need to understand the
implications if futures prices should rise or fall," he said.
Such concerns are
raised as the market continues to weigh the surprisingly small
production numbers for this fall's corn and soybean crop contained
in the last USDA estimate. One of the topics that market strategists
are rethinking is how the new countercyclical payments program will
fit into the marketing plan this fall and, especially, what price
vulnerabilities or opportunities are created by this new program.
"Recent changes in
the Aug. 12 wheat supply and demand updates from USDA will
illustrate the price vulnerabilities that could face corn and
soybean producers this fall," said Hurt.
payments are made when the 12-month (marketing year) national
average price received by farmers falls in a range between the
national loan (on the low side) and the target price minus the
direct payments on the high side. For wheat, these boundaries are
$2.80 per bushel (national loan) and $3.34 per bushel ($3.86 target
minus 52 cents in direct payment).
arises because the level at which an individual prices may be
substantially different than the national average price for the
entire marketing year," said Hurt.
[to top of second column in
"Look at what
happened to wheat on Aug. 12, when USDA raised its estimate of the
average farm price for the 2003-04 marketing year by 30 cents per
bushel. On July 9, a central Illinois elevator's wheat bid was $2.90
per bushel, and the midpoint of the USDA's estimate of the average
farm price was $3.10 (range $2.80 to $3.40). An individual who
priced his or her wheat on this date near harvest would net $2.90
from the market and have an anticipated countercyclical payment of
an additional 24 cents per bushel -- $3.10 minus $3.34."
As of the August
report, however, the USDA increased its estimate of the midpoint of
the average farm price estimate for the 2003 to 2004 crop to $3.40
(range $3.10 to $3.70). An individual who sold out of the field
would net $2.90 from the market but would now have no anticipated
"It is important to
note that this potential loss of 24 cents per bushel of
countercyclical payments has nothing to do with USDA but rather with
market forces that can quickly change farm prices and the manner in
which Congress decided to calculate the countercyclical payments,"
Hurt examined the
implications of the wheat scenario for corn and soybeans.
Countercyclical payments for corn will be made if the average farm
price falls in a range from $1.98 to $2.32. The midpoint of the
August USDA price range is $2.20 per bushel (range $2 to $2.40).
That would suggest 12 cents of countercyclical payments.
"If market prices for
corn should prove bearish this year, countercyclical payments could
increase to as much as 34 cents per bushel, and if the price pattern
proves more bullish than the midpoint of current USDA estimates, the
countercyclical payment could fall to zero," said Hurt.
countercyclical payments will be made if the average farm price
falls in a range of $5 to $5.36 per bushel. The midpoint of the
current USDA price estimate for the 2003-04 marketing year is $5.05
(range $4.55 to $5.55). This would suggest a 31-cent-per-bushel
countercyclical payment at this time, near the maximum of 36 cents
anticipated countercyclical payments are already reasonably small,"
said Hurt. "The most that can be lost is 12 cents per bushel if
subsequent prices rise, with the possibility that they could
increase to 34 cents if the average yearly price falls to $1.98 or
"On the other hand, the potential price
impact per bushel on soybeans is larger. Anticipated countercyclical
payments are already near a maximum, with the potential they could
drop to zero. Thus, the incentive to attempt to protect soybean
countercyclical payments may be larger."
of Illinois news release]