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Decisive Marketing

Missouri analyst discusses current market and potential strategies for stored grain.

By Melvin Brees
cover_dec08Store and hope? The corn and soybean price collapse since the summer highs has discouraged making sales. As a result, a large portion of this year’s corn and soybean production is now in storage or under deferred pricing contracts. But are these decisions to store grain based on market signals, or are they just made in hope that prices will improve?

Corn Prices May Break To The Downside
Futures market prices for corn remain in a downtrend. This is a technical market signal that prices are moving lower and will likely continue to do so until a clear technical signal is given that the trend is broken. Recently, March 2009 corn futures prices appear to have consolidated in a range of about $3.80 to $4.40.

However, prices are currently testing the low end of this range and threatening to break out to the downside. If this occurs, the market is signaling lower price possibilities.

Much of the lower price blame is given to the domestic and world economic problems, which are pressuring the prices of all commodities. Some analysts are using the term “demand destruction” to describe the conditions that are causing corn prices to move lower.

Status Of Corn Demand
Although the USDA forecast is for corn use to be the second largest ever, a number of factors combine to suggest a reduction in corn demand. Declining energy prices squeezes ethanol producers with lower prices and pressures demand for corn used in ethanol production.

Strength in the value of the dollar, along with increased world wheat production offered as a feed substitute, has resulted in disappointing corn export demand. Feed costs continue to squeeze livestock producers as they look for alternative feeding programs.

Other corn market signals are also mixed. Market carry (futures market price premiums for deferred month contracts) and basis (price spread between cash and futures prices or as an indicator of cash demand) usually provide market signals for making storage decisions. Currently, March 2009 corn futures prices offer about seventeen cents premium over the December 2008 contract.

Store Corn Or Not?
This price premium combined with any potential for basis gains could be interpreted as a signal to store corn. However, market volatility can easily eliminate the storage gains in a single day of trading. Basis gain opportunities may depend upon location. Slow corn exports have apparently contributed to weaker-than-normal corn basis along the Mississippi River delivery points, which is where Missouri’s grain moves to the export market.

In contrast, cash grain bids at Missouri locations, where corn goes to ethanol or feed uses, indicate a stronger-than-average basis. These combinations of some market carry, and whether there is a potential for additional basis gains, suggests mixed signals for corn storage returns.

price strategiesStorage profits will largely depend upon speculative returns, resulting from higher futures prices. Will futures prices recover? Yes, they always have! The real questions are: How low will they go or from what level will they recover? And, when will they recover? Of course, much depends upon what happens in the general economy and how deep the recession becomes. However, there are still some positive fundamentals to build higher price hopes on.

Positive Fundamentals
Domestic and world grain supplies remain relatively tight. U.S. corn and soybean ending stocks are expected to be below average. Expected 2008-09 corn carryover represents a decline from last year’s ending stocks and the resulting corn stocks/use ratio will be the lowest since 1995-96.

A significant amount of this year’s crops still remain in the field unharvested and under deteriorating weather conditions, increasing the risk of harvest losses.

The decline in corn ending stocks suggests the need to increase next year’s corn production, and low soybean carryover means soybean production levels must be maintained. However, the wet conditions and late harvest have already put producers behind in preparation for next year’s crops.

While production costs may be beginning to show some signs of moderating, high production costs remain a major concern for production decisions. At some point, it appears that the markets may need to offer some additional price incentives for 2009 crop production.

Consider Alternative Strategies
Those who are willing to store longer in anticipation of higher prices should consider alternative strategies as well, especially for grain in commercial storage. Selling cash grain and re-owning on paper might reduce risk in some cases.

With limited carry, the soybean futures market is not offering storage profits. This means that making cash sales only gives up potential for some additional basis gain and very little storage return in futures.

Re-owning with futures contracts or call options might provide the opportunity to speculate on higher soybean prices, while avoiding some of the risks and costs associated with storing grain.

This strategy may also provide some opportunity for corn sales in areas where cash bids are stronger than usual. Selling cash corn would capture the improved basis and re-owning on paper could still allow speculation on higher prices.

The disadvantage to these strategies is, of course, the risk of margin calls on speculative futures positions or expensive premiums for the call options.

No Easy Answers
Due to the impact on the markets of the current economic meltdown, there are not any easy answers. With the markets still in downtrends, there is the risk of even lower prices. Lower energy price impacts on ethanol production and slower exports raise concerns about weaker corn demand and its impact on prices.

Opting to storing grain in anticipation of higher prices may be the only hope, and there are fundamental arguments for prices to turn around.

But, it is important to recognize the risks and, if not capture higher prices, at least avoid having to sell at lower prices when cash is needed.

Melvin Brees is the market/policy Extension associate, FAPRI, University of Missouri. Read his entire column at www.agebb.missouri.edu, Farm Marketing, Decisive Marketing. Contact Brees at (573) 882-2679 or BreesM@missouri.edu.