Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
March 3, 2000

What If the Weather is Normal?

Much market discussion, this winter, has centered on the weather—especially the possibility of a drought. While grain supplies are more than adequate, demand is strong and market participants know that dry weather could reduce production and tighten supplies quickly. But what if there isn’t a drought? What if weather is normal or average?

In February, both USDA and FAPRI (Food and Agriculture Policy Research Institute) released their 2000 baseline projections for the coming years. These baselines, among other things, assume normal (average) weather. While these are long term (10 years) projections, looking at their 2000 crop projections can provides some early clues about prices that would accompany normal weather.

There are a lot of similarities in the baselines for the 2000 soybean crop. Planted acreage is expected to be 74.5 or 75 million acres with a harvested acreage of 73.5 or 74 million acres. Yield projections are 39.9 to 40 bushels per acre resulting in a total production of well over 2.9 billion bushels, which would be another record! This is not good price news, since this would be following the three largest crop years ever and already burdensome carry over supplies. The two baseline estimates of domestic use and exports vary, but both expect strong demand using more than 2.8 billion bushels. However, this is less than estimated production and ending stock would continue to grow. Both USDA and FAPRI end up with expected average prices of about $4.25.

Some private analysts and newsletters aren’t quite as pessimistic about prices. Estimates (guesses) vary somewhat, but several or them aren’t expecting quite as high yields or production. They also assume strong demand and project average prices in the $4.50 to $5.25 range with average or better weather.

These projections all suggest that waiting until the crop is made before pricing it, carries a huge amount of price risk. November soybeans are currently in the $4.25 range, well above the FAPRI and USDA normal weather price projections. While there is a good chance that spring and early summer dry weather could push prices significantly higher, if the weather turns out to be average, lower soybean prices are still very much in the cards.

There are many predictions for increased chances of drought this year and this talk has help support prices. But increased chances don't mean that dry weather, lower production and high prices will actually occur. The weather could be good, producing a large crop and very low prices. This is a very difficult situation for decision making and there will be lots of "betting on the weather" this year. It is as important to recognize the price risk of good weather as it is the production risk of bad weather. The best strategies still appear to be using a combination of marketing tools to mange some of this risk rather than betting everything on the weather.

-- Melvin


University of Missouri ExtensionDecisive Marketing - March 3, 2000
http://outreach.missouri.edu/agconnection/DCT/DM000303.html -- Revised: April 20, 2004
breesm@missouri.edu