Melvin Brees
Farm Management Specialist
University of Missouri Extension




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January 21, 2000

High Risk Speculation

Last week's USDA reports reduced 1999 corn and soybean production. Demand has been strong and will more than use up the large '99 corn crop and most of the soybean crop. While supplies are still large, this suggests that ending stocks won't be quite as abundant as earlier feared. Dry weather in South America may have reduced production there. In addition, talk about dry conditions in the U.S. and concerns for 2000 crop problems are already surfacing. Does this mean higher prices are ahead? Should you continue to store '99 crops for higher prices?

It is very important to understand the difference between capturing storage returns and speculating on higher prices. Central Missouri soybean basis has improved twenty-cents or more since harvest and is now near normal levels after more than a year of weak basis. Corn basis, while somewhat below past averages, has also improved twenty-cents or more. These basis improvements leave little opportunity for additional cash price increase from basis gains. Market carry, using the July futures contracts, offers only 15 to 16 cents for storing either corn or soybeans until July. In most cases this carry won't cover interest or storage costs. It appears that any additional storage returns from basis or market carry would be very limited and only higher prices would increase returns--that's speculating on higher prices!

It is often a good market strategy to store grain for basis improvement, since this can only be realized in the cash market, or to capture market carry. However, continuing to store grain after this has been accomplished in order to speculate on higher prices is very risky. In addition to price risk, you also have storage costs, interest costs and risk of storage losses along with the possibility of a weaker basis and the risk of losing some of what you've already gained by storing. It may make more sense to capture the storage gains by moving the cash grain and then re-owning the grain with futures or call options to speculate on higher prices--especially since the price gains must come from the futures market. Buying futures has the same downside price risk as owning grain, but eliminates the storage risks. Buying call options would reduce risk more, but you would be out the cost of the options. Either strategy provides cash for spring operating expenses or other needs.

Low prices may eventually cure low prices. After two years of declining and low prices, that's what everyone is hoping for. However, barring serious widespread crop problems, they aren't likely to improve overnight--it could take months or years. Carryover supplies are still expected to be large. Large crops would still depress prices and volatile weather markets carry a lot of risk. While the chances for higher prices seem to be improving, it is still speculation. Speculating on higher prices with grain in storage (when storage gains can already be captured) increases the risks. While storing grain might net higher prices, it is important to understand that this is high-risk speculation!

-- Melvin

University of Missouri ExtensionDecisive Marketing - January 21, 2000 -- Revised: April 20, 2004