 
August 25, 2003
MAKING STORAGE DECISIONS FOR 2003 CORN
AND SOYBEAN CROPS
Late season heat and dryness is bringing the
midwest corn and soybean crops to maturity a little quicker than
expected. As harvest draws near, producers must make pricing and
storage decisions for that portion of the crop not already priced.
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 (CCC)
loan rate.
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, results in higher prices near harvest time. 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 9 times in the past years 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. In addition, small world inventories
of feed grains and wheat keep the markets vulnerable to stronger-than-expected
demand an/or future production shortfalls. 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.
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. In the case
of soybeans, the futures market reflects a small carry from November
2003 to January 2004, but 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. In south central Illinois, for example,
the current average harvest bid is about $.215 under March 2004
futures and only $.135 under July futures. If the basis strengthens
to a typical $.10 under March futures in March 2004 and $.05 under
July futures in June 2004, the cost of maintaining ownership in
the futures market (basis appreciation) is only about $.115 to March
2004 and only $.085 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 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 does provide protection if
prices drop below the loan rate. The current average harvest bid
in south central Illinois is nearly $.50 above the loan rate.
The structure of the corn market differs from that of the soybean
market. 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 under March 2004 futures
and about $.35 under July 2004 futures. If the basis strengthens
to a typical level of about $.10 under March futures in March 2004
and $.10 under July futures in June 2004, the cost of maintaining
a long position in the futures market is about $.20 to March 2004
and $.25 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.
Issued by Darrel Good
Extension Economist
University of Illinois
 
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