Watch change in demand, basis

Futures prices have fallen back to mid-June levels, prior to weather concerns that drove prices higher. If you missed the summer rally, marketing corn and soybeans promises to be a challenge. While U.S. corn production this year is estimated by USDA to be the third largest on record at 13.69 billion bushels, soybean production at 3.92 billion bushels is estimated nearly as large as last year’

Watch change in demand, basis

Futures prices have fallen back to mid-June levels, prior to weather concerns that drove prices higher. If you missed the summer rally, marketing corn and soybeans promises to be a challenge. While U.S. corn production this year is estimated by USDA to be the third largest on record at 13.69 billion bushels, soybean production at 3.92 billion bushels is estimated nearly as large as last year’s record crop.

Demand is critical. Demand for both U.S. corn and soybeans has already become a key driver for futures prices. According to the USDA World Agricultural and Supply Estimates report for the 2015-16 marketing year, demand for corn is expected to increase slightly to 13.8 billion bushels, and the midpoint national average cash price is projected at $3.65 per bushel.

Corn demand for feed and exports remains identical to the 2014-15 marketing year, while ethanol production increases by 50 million bushels.

Soybean demand for feed increases slightly by 15 million bushels, but exports decline by 100 million bushels.

Soybean demand is expected to decline slightly to 3.72 billion bushels, and the midpoint national average cash price is projected to be $9.15 per bushel.

Concerns about demand for both corn and soybeans may stem from two different sources. The first is the concern that exports of U.S. corn will fall short of the current USDA projection of 1.85 billion bushels.

Second is the concern about weak commodity demand resulting from slow global economic growth and severe weakness in financial markets. A weakening demand implies that a lower cash price will be required to entice an increase in consumption.

So, cash pricing opportunities will be limited heading into harvest. New-crop corn prices in central Iowa are in the $3 to $3.50 range, while cash prices for soybeans are in the $8 to $9 range. Prepare now as crops in most of Iowa appear to be large and near normal for maturity.

On-farm storage should already have been emptied to prepare to store 2015 crops. When we do get futures or cash price rallies, they will likely be short-lived. Farmers should be ready to pounce should an attractive basis bid be offered.

Basis is the difference between the local cash price minus the nearby futures price. In marketing crops, farmers can make marketing decisions that target the futures price alone (a hedge-to-arrive contract), or the basis alone (a basis contract) or the combination of the two prices.

Should weather delay harvest, watch for localized basis plays as many processors will be geared up for a steady flow of bushels during harvest. Delivering corn bushels during harvest might avoid the fixed costs associated with drying, shrink and then storage.

Information on grain drying, shrink and storage decision tools prepared by retired ISU economics professor William Edwards is at the ISU Ag Decision Maker website:

“Estimating the Cost for Drying Corn,” extension.iastate.edu/agdm/crops/html/a2-31.html

“Corn Drying and Shrink Comparison,” extension.iastate.edu/agdm/crops/html/a2-32.html

“Cost of Storing Grain,” extension.iastate.edu/agdm/crops/html/a2-33.html

Johnson is the Iowa State University Extension farm management specialist for central Iowa. Email him at [email protected].

Sell corn for cash?

Here’s how the ISU Ag Decision Maker Decision Tool A2-32, “Corn Drying and Shrink Comparison,” works:

Step 1. For a variable cost estimate for on-farm drying, pick a drying system and input your variable costs: electricity, drying time and capacity, labor, average points of moisture removed per bushel, total bushels per year, and total investment in system.

Step 2. For yield and moisture projections for unharvested corn, input your decisions regarding acres harvested, wet gross bushels of yield, corn moisture in field, days before harvesting and expected cash grain price at harvest.

Step 3. To compare your grain sale alternatives at harvest, you can sell wet corn and incur a moisture discount; dry the grain commercially and then sell; or dry it on-farm and sell it.

Step 4. Input your own final moisture level for commercial sale, moisture discount for wet corn sale, commercial drying charge and shrink factor. Consider other costs like drying and hauling.

Step 5. Input your own sales alternatives after storage: months stored, cash price, moisture level for storage, minimum charge for commercial storage, base rate in months, quality deterioration, fans, electricity and labor, short-term interest rates, etc.

This article published in the August, 2015 edition of WALLACES FARMER.

All rights reserved. Copyright Farm Progress Cos. 2015.

Crop Management

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