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.
January 26, 2001

Old Crop Strategies

The initial reaction by many market analysts, to USDA's January Supply and Demand Reports, was disappointing corn demand and large soybean supplies appeared to be largely offset by reductions in corn production and apparent record soybean use. However, the market reaction has been a sharp decline in both corn and soybean price. This has obviously surprised many analysts and while the market has been described as "oversold" it has failed to recover.

Seasonal trends show that prices frequently decline at this time of year. The need for cash and "tax sales" often increases grain movement and weakens price early in the New Year. The seasonal trends also suggest that, by late winter through spring, prices generally recover--often rallying to a spring high. While seasonal trends offer expectations (hope) for a price recovery, considerable risk exists--especially due to the large soybean supplies and expectations of large South American production and increased U.S. acreage. What seasonal trends don't tell us is how low prices may go now and, if there is a spring rally, how much prices will recover. Where does this leave everyone that has corn and soybeans in storage?

If you haven't claimed the LDP and the grain is still eligible, the loan program provides alternatives. If you continue to store, the LDP functions as "a free put option." If prices go lower, a larger LDP should offset most of the reduction in cash price. Putting the grain under loan may be a good alternative, especially for short term cash needs. The loan also offers the opportunity to use the "60 day repayment agreement" provision to lock-in the repayment rate and capture short-term price increases. If prices don't recover, you can let the repayment agreement expire. You would then still have the normal marketing loan repayment provisions and market loan gains insuring at least loan price for the grain.

If the LDP has already been claimed, consider other ways to deal with the price risks. Spreading sales is one way to reduce risk. The strategy is to sell a portion of the crop, hoping it's your worst sale. If prices recover, you won't have sold it all and still have some to sell at higher prices. If prices continue to fall, you will at least have sold some before things got any worse. Spreading sales over a range of either lower or higher prices attempts to achieve a better "average" net price.

Reward Basis strength. While basis (difference between futures and cash prices) has improved (narrowed) some areas of the country, Central Missouri basis for both corn and soybeans generally remains very weak (wide). However, there is beginning to be some variability. Higher spot cash bids at some locations reflect some basis or cash market strength. Capturing basis strength through cash sales and then re-owning the grain with call options eliminates considerable storage risk. If a price rally occurs in the futures market, owning call options allows you to participate even if you've already sold the cash grain at lower prices.

It's a discouraging and difficult, but not hopeless market situation. --Melvin

 


University of Missouri ExtensionDecisive Marketing - January 26, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010126.html -- Revised: April 20, 2004
breesm@missouri.edu