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.
July 14, 2000

Discouraging Fundamentals

Analyzing market fundamental (supply and demand) information along with technical (price action) information and basis (difference between futures and local cash price) provide the starting points for developing market strategies. USDA's July 12 Supply/Demand Report provided some discouraging fundamental information.

The Supply/Demand report projects record supplies of corn and soybeans. Moisture conditions continue to improve and the drought worries have vanished! Using average yields of 40 bpa for soybeans and 137 bpa for corn, a record soybean crop and near record corn (second only to 1994) production is expected. Due to the improved growing conditions, some analysts believe that these yields are too low and production could be even higher.

Ending stocks for both old and new crop corn along with new crop soybeans are expected to increase. Increasing ending stocks usually translates into low prices and this is what USDA expects. They predict new crop prices to average $1.70 for corn (range $1.50 to $1.90) and $4.40 for soybeans (range $3.90 to $4.90).

"Those prices are below the cost-of-production!" Most of us will probably make that or similar statements. So will farm groups, news media, politicians and others. Everyone forgets that the function of the market is to find a price that matches supply with demand--not recover cost-of-production. If supplies are large, it takes "cheap" prices to find a "home" for everything.

The "bright spot" in the USDA report was expected record demand for corn and soybeans. "Low prices cure low prices" by encouraging increased use. The markets appear to be working, but it takes time. Strong demand may eventually help prices to increase, but it appears that new crop marketing strategies must first deal with low prices.

The low prices mean that basis and LDPs will again play an important role in marketing plans and strategies. Weak (wide) basis coupled with low prices the past two years have produced harvest time prices similar to USDA's current new crop estimates. Basis strengthening (narrowing) has contributed to significant price gains by early or mid winter both years. The CCC marketing loan and associated loan deficiency payments (LDP) can serve as a "free put option" to protect a price floor near the CCC loan price. The LDP can also be used to speculate on basis and enhance seasonal price gains. Capturing seasonal price increase, basis gain and skillful timing of the LDP has enabled some producers to turn harvest time prices under $5.00 into $6.00 plus soybeans!

USDA's Supply/Demand estimates and price projections are discouraging. The additional government program payments may provide some additional cash, but we can't make price go up to guarantee a profit. However it is possible is use what is available (basis gain, seasonal price increase and LDPs) to make a discouraging situation a whole lot better. --Melvin


University of Missouri ExtensionDecisive Marketing - July 14, 2000
http://outreach.missouri.edu/agconnection/DCT/DM000630.html -- Revised: April 20, 2004
breesm@missouri.edu