October 20, 2008
US economists sees hope in corn and soy
A Purdue University expert says that farmers should think about a diversified pricing strategy, as well as storing grain into spring.
Purdue Extension agricultural economist, Chris Hurt said a recent update from the US Department of Agriculture showed a 128-million-bushel increase in US corn production for the 2008 crop which means that supplies are not as tight as expected, therefore resulting in lower prices as feed usage will be up, but with oil prices falling, the USDA lowered its estimate of corn used for ethanol.
In its monthly report, the USDA dropped the estimated price level for this year's corn crop from US$5.50 in September to US$4.70 for October. Not only does the increase in supply affect the price, but Hurt said that because the grain markets are linked to the financial markets, the price could be even lower.
He said if world incomes would drop then there would be less demand for export and probably less domestic demand too. The grain markets are distinctly tied to the financial markets at this point of time and strength in the financial markets would equate to strength in the grain markets.
Cash prices dropped throughout the Midwest to near US$3.50 for corn, which may be below the cost of production for producers and that was not anticipated.
However, he explained if the financial markets stabilize in the next few weeks, extreme damage to the world economy might be avoided, which would allow cash corn prices to recover to the US$4.50 to $5 range during late winter and into spring.
With such enormous price swings, producers need to think about a diversified pricing strategy which mean farmers could price their crop periodically throughout the next six to nine months to help them get the average price and hopefully the average will be a level that at least can pay the bills for the 2008 crop.
Hurt expects to see a lot of storage this year and believes it will prove beneficial with a 60 cent premium for corn sold in the spring, but calculate an interest cost of 20 cents, which gives a 40 cent return for storing this crop and that suggests that there will be very strong storage tendencies.
USDA increased their estimates for US soy production for the 2008 crop by 50 million bushels. They also made revisions to 2007 crop by increasing the bushels produced by almost 100 million.
Hurt said it was known that going through this past marketing year had something amiss as there wasn't a large enough crop size being reported for the 2007 crop.
The bottom-line is that expected ending stocks for soy for the 2008 crop increased substantially, which like corn results in a lower price estimates. USDA lowered their estimated crop price from over US$12 in September to US$10.35, while the futures' market dropped to lows closer to US$9 for the 2008 marketing year.
Hurt pointed out that the futures' market has absorbed a lot of negativity in anticipation of declining world incomes and the numbers show it. He also noted that if the financial situation stabilizes, the downside pressure that's there now would dissipate.
With that prospect, prices could strengthen US$1 to US$2 through the winter and into spring. Like corn, there is a premium for storing soy returning at least 50 cents a bushel above interest costs.
Hurt believes that with the current situation at hand, storage is going to be beneficial as the odds favor an eventual stabilizing of financial fears.
Those who can't take the risks are probably going to have to market a little bit more here at harvest time, which may feel very dismal to be marketing at the levels seen recently.