Lower prices provide different marketing opportunities

Outlook, strategies to consider for wheat, corn, beans

By Kent Beadle

Marketing as we approach harvest is always difficult as futures markets typically are moving from a period when crop prospects are uncertain to one where supplies are known and demand for the crop is the major variable. This is certainly the case this year. While extreme volatility was the hallmark of the spring and early summer of 2004, late summer and fall look to be shaping up as the period in which supply shortages eased, and large new crop production estimates forced markets to levels unthinkable only weeks earlier. 

Our wheat markets have declined to harvest lows despite the USDA’s lower than anticipated HRW production estimates in July.  An aggressive export posture from competing exporters has hurt our early season sales pace and quality problems in the SRW crop have made Chicago delivery wheat undesirable as a backstop to either mill needs or exporter commitments. The culprit is the reportedly high levels of vomitoxin resulting from the overly wet conditions in the eastern Corn Belt.  This has hurt Chicago wheat more so than Kansas City or Minneapolis, but it has dragged those markets lower as well. Both KC and Mpls have put in new lows recently as perceptions of spring wheat production potential improve.  The dramatically lower corn price has also hurt wheat as the spread between wheat and corn has moved to a very wide level historically. 

The world wheat situation is currently in a flux.  The Canadian crop has shown improvement but there is still concern about areas in Manitoba that have continued to have excess moisture. There has also been excess moisture in parts of Europe, the Ukraine, and Russia. Quality may be down with more wheat bushels moving into feed channels.  Small milling supplies could eventually provide support to the KC and Mpls futures contracts which represent good milling quality wheat.  Meanwhile, there is more need for moisture in Argentina and Australia for the wheat crops there. Also, the Indian monsoon has been disappointing in the northern parts of the country and will need to improve quickly in order to achieve normal yields.

There appears to be enough uncertainty that producers shouldn’t give up on wheat prices just yet. Producers needing to move wheat at harvest should look at some re-ownership strategies to maintain some upside potential for this year’s crop.  Call options or bull call spreads may work this year if world production falls short of expectations.  December at the money call options can be purchased for around 16 cents, while a bull call spreads with 40 cents of upside would cost about 9 cents.

For those of you who wish to put wheat into storage, you may want to look at Floored Average contracts that can be entered into at many CHS elevator locations. For about 10 cents, you can put a floor on December futures at current levels, while pricing the December futures at the higher of either the floor, or the average settlement price of Dec futures between now and the middle of October. Other pricing periods are available with a range of floors and premiums.

Another alternative that could be considered would be cash plus contracts. With these contracts, you could receive a higher price for bushels delivered to the elevator in exchange for a firm offer on 2005 crop wheat.  The offer would become a contract if the futures are above the offer price on the expiration date of the cash plus contract. If the futures are below the offer price, no 2005 crop contract would be established but the premium received for the bushels delivered to the elevator would stand. 

Huge Corn Crop Looming
Our corn market has rapidly declined to loan levels based on perceptions of a crop size approaching 11 billion bushels. The August 12th crop production report has the first objective USDA estimate, but the trade is focusing on estimates from 10.7 billion bushels on up to estimates that approach 11.4 billion bushels. The highest estimates are being derived from the possibility that production will match the 1994 crop for the number of bushels corn yields above trend.  With usage levels already quite large, any increase in production over the current USDA estimate of 10.6 billion bushels will likely be added directly to the bottom line carryout number.  We have already priced in a 10.8 to 11 billion bushel crop with prices now hovering near loan levels.  We likely have downside in December corn down to about $2.15 or $2.20 per bushel.

Despite the large break in corn, there are bullish items to consider.  First, prices have declined to levels that are extremely attractive to the end user. Profitability is extremely good in ethanol, hogs, poultry, and in segments of the cattle industry.  End user pricing interest should be very strong.

Meanwhile, incentive to the farmer to sell corn at loan levels is very small.  Carrying charges are wide, which will provide good opportunities for those with on farm storage. Therefore, movement of corn at these lower prices will be limited to bushels that need to move for space or cash flow issues.

World coarse grain supplies are still very tight on a historical basis.  Unless we achieve the very high end yields discussed above, we will move into next spring still talking about the need to keep acreage high and to have at least trend yields or better in 2005.  A 10.6 crop should allow May and July futures to trade back up to $2.60 to $2.80 this winter or spring. 

Given what we have discussed, marketing opportunities should still present themselves.  10-20 cent rallies will likely be seen, and should be taken advantage of.  For those with space, marketing should be against the carry in the May or July futures. As with the wheat, any sales being made are good candidates for reownership strategies.  At the money call options for March are about 15 cents, and bull call spreads with 30 cents of upside can be done for 7-9 cents. For those who want to put a floor under bushels that will go into space, Floored Average contracts against the May or July futures will protect most of the carry, while still allowing for some participation in a rally if it occurs. Cash plus contracts will also be attractive for those willing to make an offer on 2005 corn.

Downside Risk in Beans
Soybeans at the time of this writing were still carrying weather premium that did not exist in wheat or corn.  However, the transition from tight old crop supplies to more plentiful new crop supplies is now complete. We believe that there is downside risk in the November contract down to the low to mid $5.00 area. South America still has old crop supplies to liquidate, and new crop soybean harvest in the U.S. is beginning. The most recent yield estimate was 39.9 bushels/acre with production at 2.94 billion bushels. Some in the trade believe that production will go above 3 billion bushels. Production of that magnitude will likely force us to $5.00/bu. However, soybean conditions are not as good as corn conditions and the most important weather is still ahead.  Any reduction from current yield estimates will allow November futures to trade back toward $6.50/bushel.

As was the case last year, China will continue to be a major wild card.  Many in the trade have assumed that Chinese defaults on cargoes purchased for this spring and summer will mean lower import requirements for this fall.  However, while the Chinese crushing industry has taken a large hit, the Chinese economy is still growing, and demand for meat should grow as well. With the lower prices now seen, a strong export program could redevelop as long as U.S. shippers can be guaranteed performance from the Chinese crushers.

So here’s how the market picture is shaping up, going into the 2004 harvest: improving crop conditions have weighed on corn, beans, and spring wheat. Late season weather problems could provide a bounce.  Strong demand and tight world supplies will also be supportive from these lower price levels.  Reownership strategies against current and futures sales are warranted.  Exchange traded calls and call spreads would be one alternative. Over-the-counter products such as the floored average contract have the advantage of allowing you to maintain some upside potential at a cost less than exchange traded options.  And cash plus contracts can allow you to receive a higher price for bushels delivered to the elevator in exchange for a firm offer for 2005 crop grain.

While the price outlook going into this fall isn’t as encouraging as the situation last spring, it provides other opportunities. Counter-cyclical payments are now back in play.  LDP’s may be available. Wider carrying charges provide better returns to your space.  All markets provide opportunities; lower prices provide different ones than do higher prices. I encourage you to consult with the grain merchandiser at your local elevator or your broker about these and other marketing strategies.  

Beadle is a commodity analyst with Country Hedging, ph 800-243-3432. Web-site is www.countryhedging.com . This information is believed to be reliable, but is not guaranteed as to accuracy or completeness, and is for information purposes only. There is risk of loss when trading commodity futures and options.

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USDA Online Commodity Briefings

In-depth statistics and reports on various topics and commodities, including corn, soybeans, and wheat. Covers market outlook, supply/use, world outlook, cost and returns data. www.ers.usda.gov/briefing/

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Online S/D Balance Sheets Give Price Forecasts

An excellent web site for grain producers to bookmark is Robert Wisner’s home page, www.econ.iastate.edu/faculty/wisner/ . Wisner is an extension ag economist at Iowa State University.  Among the many useful links on Wisner’s web site is the link “Balance Sheets,” as a PDF.   Here, Wisner keeps track of corn and soybean (limited wheat) supply/demand numbers, and gives different price scenarios that might be possible during the course of the marketing year under a below-average crop, average crop, and above-average crop.

Wisner updates his balance sheets monthly. The following table sums up his S/D-based price scenarios as of July. Bear in mind that these ranges – like any price forecasts – are “educated guesses,” highly dependent upon unknown market factors such as weather and consumption.