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"Strategies for individual
producers will likely depend on a number of factors, including
expectations about potential changes in futures prices and basis
over the next several months, cost and availability of storage,
percentage of the crop already priced, and the level of cash prices
in relation to the Commodity Credit Corporation loan rate," said
Darrel Good.
Good noted that changes in
futures prices of corn and soybeans over the next several months are
difficult to anticipate, due to the wide range of factors that can
influence price.
"Often crops that are smaller
than anticipated, which appears to be the case this year, result in
higher prices near harvest time," he said. "It is not unusual to see
the highest cash prices occur at harvest time in small crop years --
10 times in the past 30 years for corn, including last year, and
nine times for soybeans. However, prices do not always peak in the
fall when crops fall short of expectations, as was the case for
soybeans in 2002-03."
In addition to the uncertainty
about U.S. crop size this year, prices will be influenced by
smaller-than-expected grain crops in Canada, Europe and the former
Soviet Union. South American soybean acreage is expected to expand,
but production uncertainty will exist for several months.
"Additionally, small world
inventories of feed grains and wheat keep the markets vulnerable to
stronger-than-expected demand and/or future production shortfalls,"
said Good. "Depending on the nature of the U.S. growing season in
2004, prices could become quite volatile next spring and summer.
"The trading range to date for
December 2004 corn futures and November 2004 soybean futures is
extremely narrow, suggesting that wide price swings should be
expected over the next year. History suggests those contracts could
establish new lows and new highs over the coming year."
Good noted that the potential
for higher prices over the coming year suggests that producers may
want to maintain ownership of some of the crop well beyond harvest.
The spreads in the futures market, the magnitude of the current
basis and the expected basis change, and the level of storage costs
determine the least-cost method for maintaining a long position
beyond harvest.
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In the case of soybeans, the
futures market reflects a small carry from November 2003 to January
2004, but it is inverted from January forward.
"This type of price structure
means that maintaining a long position in the futures market --
either directly or indirectly with basis contracts -- is relatively
inexpensive," said Good. "In south central Illinois, for example,
the current average harvest bid is about 21½ cents under March 2004
futures and only 13½ cents under July futures.
"If the basis strengthens to a
typical 10 cents under March futures in March 2004 and 5 cents under
July futures in June 2004, the cost of maintaining ownership in the
futures market -- basis appreciation -- is only about 11½ cents to
March 2004 and only 8½ cents to June 2004."
That cost is less than the cost
(interest plus storage) of maintaining ownership of the crop for
many producers. Maintaining a long position with at-the-money call
options would add 30 to 35 cents to the cost of maintaining a long
position with futures or basis contracts but would provide some
downside price protection. Similarly, storage of soybeans may be
more expensive than alternatives, but it does provide protection if
prices drop below the loan rate. The current average harvest bid in
south central Illinois is nearly 50 cents above the loan rate.
"The structure of the corn
market differs from that of the soybean market," Good said. "Spreads
in the futures market are positive from December 2003 through July
2004. In south central Illinois, the current average bid for harvest
delivery is about 30 cents under March 2004 futures and about 35
cents under July 2004 futures. If the basis strengthens to a typical
level of about 10 cents under March futures in March 2004 and 10
cents under July futures in June 2004, the cost of maintaining a
long position in the futures market is about 20 cents to March 2004
and 25 cents to June 2004.
"Many producers can store corn at a lower cost, particularly if the
crop is placed under loan and only the out-of-pocket cost of on-farm
facilities is considered. Additionally, maintaining a long position
with storage keeps the price protection of the loan program in
place."
[University
of Illinois news release]
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