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"On the cost side, commercial storage rates have increased in
many areas for the first time in a number of years, to finally
acknowledge the increasing costs of building and owning storage
facilities," said Darrel Good. "Commercial storage rates may
exceed the current carry in the market so that forward-pricing
corn stored commercially for later delivery is not profitable.
"The carry, however, exceeds the out-of-pocket costs for using
existing on-farm storage facilities, but the returns for forward
pricing have been reduced."
Good's comments came as he reviewed the corn market as the
2006 harvest gets under way.
"Prospects for a sharp drawdown in U.S. and world grain
inventories during the current marketing year suggest that spot
cash corn prices will move higher over the next several months,"
he said. "However, recent price behavior has resulted in less
incentive to store the early-harvested crop."
Good noted that prospects for large year-ending U.S. corn
stocks and a large 2006 harvest, along with ideas that
transportation costs could remain high, resulted in a very weak
new-crop corn basis during most of August. In addition, spreads
in the futures market became relatively wide.
In mid-August, for example, the average harvest delivery bid
in central Illinois was 37 cents under December 2006 futures, 52
cents under March 2007 futures and 70 cents under July 2007
futures.
"Depending on expectations about basis levels in the spring
of 2007, the market was offering about 50 cents per bushel to
store the crop from harvest to late spring of 2007," said Good.
"That potential return to storage exceeded the full cost of
storage, including interest, for many producers.
"Cash bids for harvest delivery at that time were near $2.
Through a combination of low prices and a large return to
storage, the market was strongly encouraging producers to plan
to store as much of the unpriced crop as possible."
The price structure changed over the past few weeks as the
market worried about a late harvest and a harvest that could get
stretched out due to a period of wet weather. There are also
some who believe that the USDA's September production forecast
overstates the potential size of the 2006 crop, pointing to an
implied high average ear weight in that report and reports of
lower-than-expected yields in some areas.
"In addition, crop condition ratings -- 60 percent in good or
excellent condition as of Sept. 17 -- do not point to a yield as
high as the 154.7 bushels forecast by USDA, even though actual
yields have exceeded yields projected by crop ratings for the
past seven years," said Good. "It is rare, but not
unprecedented, for the production estimate in January after
harvest to be below the September forecast following an increase
in the forecast from August to September.
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 "Over the past 35 years, that scenario occurred three times --
1973, 1974 and 1990. There were only eight years in total over the
past 35 that the January corn production estimate was below the
September forecast by a meaningful amount. The USDA will issue a new
production forecast on Oct. 12."
On Sept. 22, the average spot cash bid for corn in central
Illinois was $2.30. That bid was 25.25 cents under December futures,
38.5 cents under March 2007 futures and 53.25 cents under July 2007
futures. For corn stored from harvest until March 2007, the market
was paying 13 cents less for storage than in mid-August, while the
return to storage until late spring 2007 was down 16 cents.
Forward cash bids for January delivery in central Illinois are
currently only about 14 cents above the spot cash bid. Depending on
the magnitude of expected basis, the market is paying about 35 to 40
cents to store corn from now until late spring 2007 in central
Illinois.
"Storing corn unpriced may still be an acceptable marketing
alternative for a portion of the crop since market fundamentals
suggest that prices could move significantly higher as the marketing
year progresses," Good said. "For high-cost storage situations,
however, an increase in futures prices along with a typical
strengthening of the basis will be required to recover the full
costs of storage. In those situations, other alternatives can be
considered.
"Those alternatives include just selling the crop at harvest and
avoiding the substantial cost of ownership. For those who believe
that futures prices will increase, the strong basis and smaller
carry in the futures markets now mean that basis contracts or
replacing cash sales with long futures positions can be considered
as an alternative to physical storage."
Ownership of call options rather than a basis contract or
ownership of futures might also be considered in order to manage
downside price risk, he added.
"However, at-the-money call options are rather expensive, raising
the cost of ownership through options, so that strategies to reduce
the options cost might be considered. These strategies generally
involve selling call options with higher strike prices against the
long call options. Such strategies reduce the next [net?] cost but
also establish a price ceiling."
For the 2005 crop, loan deficiency and countercyclical payments
were very large for corn.
"As prices move to levels that reduce or eliminate these
payments, there is more incentive to develop sound marketing
strategies for corn," Good said. "Strategies should adjust as price
levels and price relationships change."
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]
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