Crop Market Price Outlook

Utilizing Cash Marketing

Tools

Selling Old & New Crop Corn & Soybeans

Crop Market Outlook & Risk Management Strategies

December 2009

Steven D. JohnsonFarm & Ag Business Management Specialist

(515) 957-5790sdjohns@iastate.edu

www.extension.iastate.edu/polk/farmmanagement.htm

Presentation Objectives

• Overview of 2009 Crop Supply/Demand, Price Outlook & Marketing Strategies

• Review Grain Storage & Cash Marketing Decisions

• Highlight 2010 Crop Cost of Production Estimates• Provide 5 Strategies for Capturing $4/bu Cash

Corn & $10/bu Cash Soybean Prices• Summarize 5 Strategies & 5 Websites for

Managing Crop Risks & Revenue

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Iowa 2009 Crop Yield Estimates

Source: USDA Iowa NASS, November 2009

U.S. Corn Supply/Demand & Price

Midpoint $3.55/bu

Source: USDA WASDE, Nov. 10th, 2009

2008-09 Estimated 2009-10 Projected

Area Planted 86.0 86.4

Area Harvested 78.6 79.3

Yield 153.9 162.9

Beginning Stocks 1,624 1,674

Production 12,101 12,921

Imports 14 10

Supply, Total 13,739 14,605

Feed & Residual 5,254 5,400

Food, Seed & Industrial 4,953 5,480

Domestic Use, Total 10,207 10,880

Exports 1,858 2,100

Use, Total 12,065 12,980

Ending Stocks 1,674 1,625

Average Farm Price $4.06 $3.25 - $3.85

Corn Balance Sheet

Source: Wisner, ISU Biofuels Economist, November 2009

Corn Estimates through 2010-11

$4.20$4.06

$3.45$3.75

Source: Wisner, ISU Biofuels Economist, November 2009

Nearby Corn Futures

Source: www.jimwyckoff.com, Dec. 3rd, 2009

Sept$4.12

July $4.04

May$3.95

Mar.$3.84

Corn Futures Carry Dec. 2010$4.20

Source: www.cmegroup.com

December 7th , 2009

Good Carry into spring/summer months – utilize on-farm storage and monitor grain quality

Dec. 2011$4.32

Corn Basis Trends

Source: www.farmprogress.com December 2009

Wider than Normal with Late Harvest Pressure

Corn Storage Costs

Assumption: Corn is Valued at $3.50/bu - Financed @ 7%

APR

.20

.30

.32

.49

.44

.69

.56

.89

Source: Johnson, ISU Extension, November 2009

Storing until April:Costs an extra 20 to 40 cents

Corn & Soybean Storage Issues

Source: www.iowagrain.org, November 2009

Source: USDA WASDE, Nov. 10th, 2009

U.S. Soybean Supply/Demand & Price

Midpoint $9.20/bu

2008-09 Estimated 2009-10 Projected

Area Planted 75.7 77.5

Area Harvested 74.7 76.6

Yield 39.7 43.3

Beginning Stocks 205 138

Production 2,967 3,319

Imports 13 8

Supply, Total 3,185 3,465

Crush 1,662 1,695

Exports 1,283 1,325

Seed 95 94

Residual 6 81

Use, Total 3,047 3,195

Ending Stocks 138 270

Average Farm Price $9.97 $8.20 - $10.20

Soybean Balance Sheet

Source: Wisner, ISU Biofuels Economist, November 2009

Soybean Estimates through 2010-11

$10.10

$10.00

$8.95$8.25

Source: Wisner, ISU Biofuels Economist, November 2009

Nearby Soybean Futures

Source: www.jimwyckoff.com, Nov. 13th, 2009

Jul.$10.76

May $10.69

Mar.$10.61

Jan$10.53

December 7th , 2009

Soybean Futures Carry

Nov. 2010$10.47

Source: www.cmegroup.com

Lack of Carry, little incentive to hold soybeans beyond winter months

Nov. 2011$10.37

Soybean Basis Trends

Source: www.farmprogress.com December 2009

Narrows Post Harvest: Flat through Summer

Soybean Storage Costs

Assumption: Soybeans are Valued

at $9.50/bu - Financed @ 7% APR

.10

.29

.40.49

.70

.69

1.00

Source: Johnson, ISU Extension, November 2009

Storing until April:Costs an extra 40 to 60 cents

Percent of Cash Crops Sold by Month

Source: USDA NASS, 1990-09, October 2009

Corn Sales: Fall Sales, Peak in January, level rest of year

Soybean Sales: Peak in October, High in January, decreases monthly

Marketing Decision Chart

BasisWeakens

BasisStrengthens

FuturesDecrease

FuturesIncrease

ExpectedChange

• Basis Contract• Sell Cash and Buy Futures• Call Options• Minimum Price Contract,

Fixed Basis

• Store & Wait to Price• Delayed Price Contract• Minimum Price Contract,

Variable Basis

• Cash Sale• Forward Contract

• Hedge• Hedge to Arrive/NBE• Put Options

Source: ISU Extension Economics, December 2009

#1: Corn Basis Contract (Replace Cash Sale with March

Futures) • Deliver Cash Corn and Cut Storage Costs. Fixes

the Basis, but not the Futures Price. Elevator/Processor replaces these bushels with a March Futures Contract. – Corn example: March ‘10 futures closed at

$3.84 the day of the transaction. What is your Potential Price received?

Cash selling price - transaction fee – March futures by 3/1 = Potential Price

$3.64 + -.02 $4.24 (+ $.40) $4.02/bu

Source: Johnson, ISU Extension, December 2009

#2 Corn Minimum Price ContractSell Cash Corn & Replace with a Call

Option • Also called a Minimum Price Contract

– Corn example: Deliver Cash Corn and Cut Storage Costs. Fixes the Basis, but not the Futures Price. Cash selling price is $3.62, May ‘10 futures closes at $3.95, a Call Option with an $4.20 Strike Price has a .23 cent premium.

a) What is the Minimum Price received?Cash selling price – call premium – brokerage fee = Minimum Price

$3.62 - .23 - .02

$ .65

Source: Johnson, ISU Extension, December 2009

b) What is the Potential Value of this Call?May Futures in mid-April – Strike Price = Cash Value of Call Option

$4.85 - $4.20

$3.37

#3 Soybean Minimum Price Contract

Sell Cash Soybeans & Replace with a Call

Option • Soybean example: Deliver Cash Soybeans and Cut Storage Costs. Fixes the Basis, but not the Futures Price via a Call Option. Cash selling price is $9.94, May ‘10 futures closes at $10.69, a Call Option with an $11.00 Strike Price has a .75 cent premium.

a) What is the Minimum Price received?

Cash selling price – call premium – brokerage fee = Minimum Price

$9.94 - .75 - .02

$1.00

Source: Johnson, ISU Extension, December 2009

b) What is the Potential Value of this Call?May Futures in mid-April – Strike Price = Cash Value of Call Option

$12.00 - $11.00

$9.17

2010 Crop Cost Estimates

$667$629

$437

$4.04/bu $3.49/bu $8.74/buCost per bushel

Average Yield 165 bu/a 180 bu/a 50 bu/a

Source: Duffy, ISU Extension Economist, December 2009

#4: HTA New Crop Corn Now

• Hedge-to-Arrive Contract (fixes futures price but not the basis)– Example: Dec. ‘10 Corn futures closed at

$4.20, Fall Harvest Basis next October is expected to be $ - .30 under December corn futures.

Dec. ‘10 Corn Futures –Expected Basis = Expected Cash Price

$4.20 - .30 $3.90

Source: Johnson, ISU Extension, December 2009

What is the Expected Cash Price?

#5 Forward Contract New Crop Soybeans Now

• Cash Forward Contract (fixes both futures price and basis)– Example: Nov. ‘10 Soybean futures closed at $

10.47. Fall Harvest Basis next October is offered at $ - .40 under November soybean futures.

Nov. ‘10 Soybean Futures – Basis = Forward Cash Contract Price

$10.47 - .40 $10.07

Source: Johnson, ISU Extension, December 2009

What is the Forward Cash Contract Price?

5 Strategies for $4 Corn & $10 Soybeans

Know Your Cost of

Production

Pre-Harvest Sell Bushels;

Reduce Handling, Storage &

Risk

Use Early Sales to Cover Fall/Winter Cash Flow

Sell In-Town

Bushels First,

Monitor On-Farm Quality

Learn to Use a

Variety of Marketing

Tools

Source: Johnson, ISU Extension, December 2009

Risk Management Web Sites• Crop Risk Management - ISU Polk County

(Newsletters, Updates and Webcasts)www.extension.iastate.edu/polk/farmmanagement

• Dr. Chad Hart - ISU Extension Grain Marketing www.econ.iastate.edu/faculty/hart

• Iowa Grain Quality Initiative – ISU Extensionwww.iowagrain.org

• Farm Doc – U. of Illinois Extension www.farmdoc.illinois.edu

• Ag Decision Maker – ISU Extension(Decision Tools, Newsletters, Publications and Voiced Media)www.extension.iastate.edu/agdm

Source: Johnson, ISU Extension, December 2009