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Price Outlook for 2005 Harvest Best approach is to examine each major crop, run “what if” scenarios By Kent Beadle The grain price outlook for 2005 is currently in a “state of flux” for all three of the major U.S. crops. Yield potential has been reduced in soybeans, corn, and wheat due to various reasons, although many areas still have very good production potential. Demand has been weaker than anticipated in some sectors, but better in others. The best way to handle the price outlook is to examine each major crop, and run a few “what if” scenarios to cover the different yield outcomes that are currently still possible. Wheat: looking to corn & beans for support The lower crop estimate and the firmness of corn and soybeans have lifted Kansas City wheat futures to higher levels than anticipated. KC September futures have recently challenged resistance in the $3.50 to $3.55 area. A close above $3.56 sets the contract up for a run to our March highs at $3.75. However, if row crops lose some of their weather premium and if the USDA confirms higher HRW production, we could easily see a move in KC September futures back down to the $3.15 to $3.25 area. Spring wheat growing conditions have generally been quite good with the exception of northwest Minnesota and parts of eastern North Dakota where excessive rainfall and scab have been a problem. The Wheat Quality Council’s preharvest spring wheat tour late July estimated an average yield of 35.5 bu/acre for the spring wheat crop, based on field samples in North Dakota, western Minnesota and northern South Dakota. That’s down from the tour’s estimate of 38.8 bu/ac average last year, blamed largely on the effects of excessive moisture, including scab. We won’t get a more definitive answer about this year’s spring wheat quality and quantity until harvest wraps up. While spring wheat yield potential looks to fall short of levels produced the last two years, overall, production continues to appear above average. In addition, hot weather (and wheat stressed by scab) could allow the crop to add some protein. Despite the production potential, Minneapolis September futures in July rallied in sympathy with the higher corn and soybean markets. We challenged long term resistance in the $3.62 to $3.68 area. A close above $3.68 and we would look for a challenge of our March highs at $3.85. However, a loss of weather premium in row crops combined with harvest pressure could force Minneapolis September futures back down to long term support in the $3.25 to $3.35 area. We should mention a couple of our world wheat competitors, and their likely impact on U.S. exports during the 2005/06 marketing season. Australia appears to be coming out of their very severe drought, and many private observers are forecasting production in the 23-24 million metric ton range, above the 21.5 MMT that the USDA forecast in July. This is well above early season estimates and should allow them to be stiff competitors. Canada also looks to have better crops this year, after last year’s disastrous harvest where most of their wheat was of feed quality. The USDA raised their estimate by 500 TMT to 24 MMT in July. While this is still over a million and a half tons below last year’s crop, the quality will likely be much better, allowing for much stronger competition into world markets. The combination of both Australia and Canada having more exportable wheat could negatively impact our export sales on future balance sheets. So in August, keep an eye on how weather is affecting U.S. corn and soybean crops. Favorable corn/soy yield potential and an upward revision of the HRW crop (see USDA’s August 12 S/D report) would be expected to soften support in the wheat market. Ample U.S. wheat carryover (around 25% at this writing) and strong expected wheat export competition would also be bearish for the post-harvest wheat picture. U.S. Wheat Production and Exports Corn: watch projected yield for price direction Our current situation is really a tale of two crops. As I mentioned, the Illinois crop appears to be down and crops in southern Wisconsin, northern Indiana and Ohio also have likely lost bushels due to lack of rainfall and heat stress. On the other hand, crops in Nebraska, Iowa, Minnesota, and the Dakotas had received regular moisture through the month of June and are in very good condition, despite some hot temperatures in the first half of July. Yield potential in the western Corn Belt is excellent but our recent hot spell will make it important that rainfall continues on a regular basis. The USDA in their July production report forecast U.S. corn yields at 145 bushels per acre, down 3 bushels from their June forecast. Many private forecasters currently believe that the U.S. yield is closer to a range of 137 and 140 bushels per acre. It is my belief that 140 bushels per acre may be reasonable at this time. However, by the time you read this estimates may be significantly different. Let’s look a few of the possibilities. The current USDA estimate of 145 bushels per acre is likely the highest estimate we can attain. Should rainfall be plentiful, and temperatures moderate, a 145 yield would result in ending stocks for Sept. 1, 2006 at 2.240 billion bushels, slightly higher than this year’s ending stocks estimate of 2.115 billion bushels. Harvest lows would likely be similar to a year ago, somewhere in the $1.90 to $2.00 area. LDPs would likely be even higher than a year ago as the combination of large carryout stocks and large production in the western belt would likely keep basis wider than a year ago. Should our corn production drop to 138 bushels per acre, the price scenario changes. The 138 average could be achieved if rainfall and temperatures remains OK for the western belt , but remain more detrimental for the eastern belt. At a 138 bushel yield, ending stocks drop to just less than 1.7 billion bushels. This is a carryout level that is still quite adequate. The crop would not need to be rationed by price. Harvest lows would still likely be in the $2.00 to $2.20 area. However, winter demand would be monitored much more closely and the spring and summer weather of 2006 would need to be better than this year or a much stronger rally would ensue next summer. Should weather be hot and dry enough to lower western corn belt yields to trend or slightly below, our corn production could drop to 130 bushels per acre. This would drop our carryout to about 1.1 billion bushels. While we still would not be required to ration demand at this level, we would likely be uncomfortable about future supplies that harvest lows wouldn’t drop below the $2.25 to $2.50 area. Finally, it is possible (although not likely) that we achieve heat-stressed yields that rival scorched yields of 1988. I would estimate that crop loss on the magnitude of 1988, would put the corn yield at 118 bushels per acre. Of course, that yield would require significant rationing and would likely result in prices from harvest throughout the winter and into the spring of 2006 at or above $3.00 per bushel with the possibility of futures trading as high as $4.00 or more. Keep your eye on the weather reports in August and September, and market accordingly. U.S. Corn Supply and Demand Balance under Different Yields
Soybeans: market volatility could move price anywhere from $5-$10 The July USDA report forecast U.S. soybean yield at 39.9 bushels per acre, unchanged from the June estimate. Although soybean condition ratings have deteriorated, the key yield determining weather is still ahead of us, with August a key. Let’s look a few scenarios. Should the temperatures return to normal, and rain becomes plentiful, it is still possible for the national yield to hit 41 bushels per acre. This would result in ending stocks at about 280 million bushels, and would likely mean a significant price drop into harvest. We could see futures back down under $6.00, and possibly as low as $5.50 if our soybean yield was a bushel higher than trend. Of course, this yield estimate would also require us to dodge any rust outbreak. At the time of this writing, no rust has been discovered on any soybeans in the major Corn Belt producing states. Should rust be discovered, I believe that we are currently ready to tackle the disease. However, it is possible that weather could conspire to make rust control difficult. It is still possible that we could attain the USDA trendline estimate of 39.9 bushels per acre. Under this scenario, we would have a carryout of 210 million bushels, and we would likely see harvest lows around the $6.00 area. Normally, we would see lower harvest lows with a carryout above 200 million bushels but this year, I believe that the uncertainty about South American acreage and production prospects will keep some risk premium in the marketplace. Should we drop just two bushels per acre, to a yield of 37.9, we would show ending stocks at about 75 million bushels. This is a borderline situation that would likely require some price rationing over the course of the next year. Harvest lows in this situation would likely be $6.50 to $7.00 with demand and South American weather potentially driving us much higher. The most bullish scenario would be one in which a combination of hot/dry weather and or rust drove U.S. yields down about 5 bushels per acre below trend to the 35 bushel per acre area. At that point, we would need to ration about 250 million bushels of usage, and we easily could see futures move to the $10 level or higher in order to accomplish this. So as you can see, soybeans have the potential for extreme volatility over the balance of the summer, into harvest, and beyond. Sorting out pricing strategies If you haven’t made any new crop sales when you read this, and if prices are still above the norm and satisfy your breakeven and profit objectives, you should look at making a sale on 10-20% of your crop. Many of you have already made these sales. Once you have 20% of your crop sold, take a look at some of the alternatives that put a floor on your crop but also give you some upside. Put purchases are one alternative. Some of the options are expensive but you should focus on the floor price you are establishing and the gross dollars per acre that floor represents. A min/max contract would be a second alternative. This is the purchase of a put combined with the sale of a call. This cheapens up the cost of the put in exchange for accepting a ceiling. There are some good over-the-counter (OTC) contracts out there as well. Country Hedging Inc. (CHI) elevator clients are offering CHI Compass Contracts that you might be interested in. This is a floored average contract which establishes a floor and settle at the higher of the floor or the average futures price over the life of the contract. These contracts cost much less than exchange-traded puts. Price Builder Contracts, also available through CHI elevators, offer you the ability to price bushels every day at a price level that is above the corresponding futures price at the time the contract is established. Bushels price until the contract is filled, or until a pre-established “knock-out” price is touched. This “knock-out” price is below the futures market at the time the contract is established and if the ‘knock-out” price is hit, all pricing ends and the remaining bushels on the contract must be priced using other methods. Check with your Country Hedging broker or with your local elevator to see if these contracts are offered. Whatever method you use to price additional bushels, keep in mind that you should feel comfortable pricing bushels up to the amount of CRC or RA insurance that you have purchased. U.S. Soybean Supply and demand Balance under Different Yields
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