Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

Decisive Marketing

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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.
May 25, 2001

Why So Low?

“I’ve never seen soybean prices stay this low for so long, will they ever go up?”  “If they’re this low now, what’ll they be this fall?”  Those two questions (from different individuals) seem to represent everyone’s concern about low prices.  Historical price data suggests that season spring highs for corn and soybeans usually occur during April and May.  Instead, the November soybean and December corn futures contracts have been at or near contract lows for the past several weeks.  Central Missouri new crop soybean bids are below $4.00 and some new crop corn bids are below loan price.  Why are prices so low?

There are a lot of reasons for low crop prices because they are complex worldwide markets.  A major reason for low price is large supplies resulting from four years of large or record setting crops in both hemispheres.  Adding to the supply pressure is an expected fifth year of large U.S. crop production on the way.  These large supplies have and are expected to continue to more than meet demand needs—even with record levels of use.  When there is more than enough, prices go down!

The marketing loan is also blamed for contributing to low prices.  Previous loan programs allowed producers to forfeit grain to CCC or enter reserve programs when prices were low.  These reserves temporarily reduced supply by isolating this grain from the market until prices rose to pre-determined release prices.  This tended to support cash prices near loan price.  Some suggest a return to reserve programs, but remember that it can also be argued that these reserves hung over the market and limited price rallies when they were released.

Under the marketing loan program, when prices fall below loan price, the MLG (market loan gain) or LDP (loan deficiency payment) make up the difference between cash price and loan price without the grain being forfeited or being put into reserves.  The grain is still available to the market and prices can fall low enough to “clear” the market.  The current record use levels suggest this works.  This means that while large supplies are depressing the markets.  Should weather problems develop, supply could tighten quickly without reserves and send prices higher—maybe sharply higher.

 While the marketing loan allows low prices, it can insure that you don’t end up with low prices.  Placing the grain under loan or collecting the LDP effectively supports price at the county loan price (market price plus LDP or MLG equals a net price at loan price).  In addition market strategies that capture basis gains, futures market carry and/or capture small price rallies can add to net price received.  Similar strategies combined with managing the LDP have made $6.00 soybeans possible in the last three years! 

 Why are prices so low?  There are many reasons, but how you deal with them is more important than the why.  Low price doesn’t necessarily mean there won’t be opportunities.  Recognizing market signals and utilizing a variety of marketing tools along with the LDP or MLG will be essential to successful marketing.  Low prices are a concern, but they shouldn’t be the prices you take to the bank!--Melvin


University of Missouri ExtensionDecisive Marketing - May 25, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010525.html -- Revised: April 20, 2004
breesm@missouri.edu