Crops Marketing and Management Update

Transcription

1 Crops Marketing and Management Update Department of Agricultural Economics Princeton REC Dr. Todd D. Davis Assistant Extension Professor -- Crop Economics Marketing & Management Vol (7) September 18, 2015 Topics in this Month s Update: 1. September 11 th Crop Production Report Spurs Corn Market and Surprises Soybean Market 2. September 11 th WASDE Update 3. Crop Precipitation and Temperature Maps and Weather Outlook 4. Comparing Harvest-Time and January Cash-Forward-Contract Bids and Managing Risk 5. Comparing Storage Costs and Spot Price Appreciation from October to Spring and Summer 6. Corn and Soybean Storage Risk Management Alternatives 7. How Do I Get on the Distribution List to Receive this Newsletter? Topic 1. September 11 th Crop Production Report Spurs Corn Market and Surprises Soybean Market The September 11 th Crop Production report provided an updated objective yield and farmer survey yield projection for both the corn and soybeans. The August report befuddled both analysts and farmers and both were looking to USDA to make significant yield adjustments because of the wet weather that plagued the Eastern Corn Belt plus Missouri this summer. Reuter s survey of analysts expected USDA to trim the corn yield from the August report with the average yield forecasted by private-sector analysts at bu./acre. USDA did reduce the projected corn yield to bu./acre which is 1.3 bu./acre less than the August forecast. If realized, this would be the second largest yield on record (Table 1). The market reacted favorably to this yield reduction. USDA is projecting the 2015 corn crop at billion bushels which is 101 million bushels smaller than the August forecast. Analysts were expecting 2015 production at billion bushels so USDA s projection was a little bearish for the market. If realized, the 2015 corn crop would be 631 million bushels smaller than the 2014 crop but would still be the third largest crop in history. Where did USDA make the corn yield adjustments from their August report? USDA reduced the projected yield in Indiana (down 2 bushels to 156 bu./acre ), Iowa (down 2 bushels to 181 bu./acre), Kansas (down 4 bushels to 148 bu./acre), Michigan (down 1 bushels to 164 bu./acre), Minnesota (down 1 bushel to 183 bu./acre), Nebraska (down 3 bushels to 184 bu./acre), Ohio (down 5 bushels to 163 bu./acre), South Dakota (down 1 bushel to 159 bu./acre), and Wisconsin (down 1 bushel to 162 bushels/acre). USDA increased the projected corn yield in Illinois (up 1 bushel to 173 bu./acre) and North Dakota (up 2 bushels to 128 bushels/acre). USDA is projecting 2015 corn production in the Midwest to be 518 million bushels lower than the 2014 crop. In the South, USDA is projecting the region to produce 71 million bushels less than in Since this region is corn deficit, even more corn from the Midwest will be needed in to meet regional demand. Given that Illinois, Indiana, and Ohio all have smaller crops than 2014, this suggests that the Southeast will have to aggressively 1

2 bid for corn from further into the Midwest to meet demand. Kentucky could benefit from a particularly stronger basis spurred from the Southeast s demand for corn. Table 1. Potential 2015 Corn Production with Comparison to 2014 Assuming September Production Acreage and Yield Forecast Yield 2015 Yield 2014 Production Change from September (F) August (F) Yield September 2015 (F) Million Bushels Illinois ,015 2, Indiana , Iowa ,407 2, Kansas Michigan Minnesota ,418 1, Missouri Nebraska ,638 1, North Dakota Ohio South Dakota Wisconsin Midwest Total 11,812 12, Alabama Arkansas Florida Georgia Kentucky Louisiana Mississippi North Carolina Oklahoma South Carolina Tennessee Texas Virginia South Total 1,212 1, United States ,585 14, Table 1 illustrates the Eastern vs. Western Corn Belt difference in growing season. The Western Corn Belt states are projected to have higher yields than Iowa (+3 for 181 bu./acre), Minnesota (+27 for 183 bu./acre), Nebraska (+5 for 184 bu./acre), South Dakota (+11 for 159 bu./acre) and North Dakota (+4 for 128 bu./acre). In contrast, the Eastern Corn Belt plus Missouri are projected to have significantly lower yields. Illinois (-27 for 173 bu./acre), Indiana (-32 for 156 bu./acre), Ohio (-13 for 163 bu./acre) and Missouri (-36 for 150 bu./acre). Analysts also expected USDA to lower the 2015 soybean yield to 46.4 bu./acre. USDA continued to surprise analysts and farmers by increasing the projected soybean yield to 47.1 bushels per acre from the August estimate of 46.9 bu./acre (Table 2). USDA is forecasting the U.S. soybean crop to be billion bushels which would be the second largest crop in history record, if realized. The market was not expecting the yield increase and the surprising increase in production was a bearish number for the market. While not a record, the 2015 soybean crop would only be 34 million bushels smaller than the 2014 crop (Table 2). USDA increased soybean yield from the August projections in Illinois (up 1 bushel to 54 bu./acre), Indiana (up 1 bushel to 50 bu./acre), Iowa (up 1 bushel to 53 bu./acre), Michigan (up 1 bushel to 47 bu./acre), Missouri (up 2 bushels to 40 bu./acre), and South Dakota (up 1 bushel to 46 bu./acre). USDA trimmed yields in Minnesota (down 1 bushel to 47 bu./acre) and North Dakota (down 1 bushel to 33 bu./acre). Total soybean production in the Midwest is projected to be 32 million bushels less than in The Southern region is projected to have a slightly smaller crop (1 million bushels less than in 2014). The market is already looking forward to the October Crop Production report as it will incorporate the USDA- FSA certified acreage information to better estimate the amount of acres that were prevented from planting this year. The question of the amount of prevented planted acres is something the market wrestles with in years when there is a wet spring and planting is extended beyond the optimal agronomic planting window. As harvest gets underway, USDA will include actual harvested yield data which greatly improves the production estimates. 2

3 Table 2. Potential 2015 Soybean Production with Comparison to 2014 Assuming September Production Acreage and Yield Forecast Yield 2015 Yield 2014 Production Change from September (F) August (F) Yield September 2015 (F) Million Bushels Illinois Indiana Iowa Kansas Michigan Minnesota Missouri Nebraska North Dakota Ohio South Dakota Wisconsin Midwest Total 3,183 3, Alabama Arkansas Florida Georgia Kentucky Louisiana Mississippi North Carolina Oklahoma South Carolina Tennessee Texas Virginia South Total United States ,935 3, As in corn, there is a Western vs. Eastern Corn Belt yield difference from However it is not as pronounced in soybeans as in corn. In the west, Iowa (+1 at 53 bu./acre), Minnesota (+5 at 47 bu./acre), Nebraska (+2 at 56 bu./acre), and South Dakota (+1 at 46 bu./acre). In the east, USDA is projecting lower yields than in For example, Illinois (-2 at 54 bu./acre), Indiana (-6 at 50 bu./acre), Ohio (-5 at 48 bu./acre) and Missouri (-7 at 40 bu./acre). Topic 2. September 11 th WASDE Update The September WASDE continues to incorporate the Crop Production projections into the supply/demand forecasts. The corn, soybean and wheat markets are all struggling with bearish fundamentals of rebuilding stocks both domestically and globally which will limit price potential. Table 3. U.S. Corn Supply and Use Change from Estimated Projected Projected Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks ,232 1, Production 10,755 13,829 14,216 13, Imports Total Supply 11,904 14,686 15,477 15, Feed and Residual 4,315 5,036 5,300 5, Food, Seed & Industrial 6,038 6,501 6,570 6, Ethanol and by-products 4,641 5,134 5,205 5, Exports 730 1,917 1,875 1, Total Use 11,083 13,454 13,745 13, Ending Stocks 821 1,232 1,732 1, Stocks/Use 7.4% 9.2% 12.6% 11.6% -1.0% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $6.89 $4.46 $3.68 $3.75 $0.07 Source: September 2015 WASDE - USDA: WAOB. USDA made minor adjustments to the old-crop corn balance sheet by increasing FSI use by 10 million bushels, ethanol use by 5 million bushels, and exports by 25 million bushels from the August report. These adjustments lowered ending-stocks by 40 million bushels to a projected billion bushels. USDA also lowered the U.S. marketing-year average (MYA) price by 2 cents to $3.68/bushel (Table 3). For the new-crop balance sheet, total corn supply was reduced 141 million bushels from August due to a smaller projected crop (101 million bushels) and reduced carry-in (40 million bushels). On the demand side, USDA reduced feed use by 25 million bushels but increased FSI demand by 5 million bushels. Corn ending-stocks are projected at billion bushels down from the billion bushels forecasted in August. If realized, the ending-stocks would decline by 140 million bushels from (Table 3). The corn market has successfully rebuilt stocks from 821 million bushels in which was about a 27 day supply of corn at the end of the marketing-year. Projected ending-stocks of billion bushels can be thought of as about a 42 day supply of corn on hand on September 1, 2016, if realized. This increase in stocks will limit price potential with the projected U.S. MYA price at $3.75 which is a $0.07/bu. increase from the previous marketing-year. 3

4 Table 4. U.S. Soybean Supply and Use Change from Estimated Projected Projected Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks Production 3,042 3,358 3,969 3, Imports Total Supply 3,252 3,570 4,094 4, Crushings 1,689 1,734 1,870 1, Exports 1,317 1,647 1,835 1, Seed Residual Total Use 3,111 3,478 3,884 3, Ending Stocks Stocks/Use 4.5% 2.6% 5.4% 12.1% +6.7% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $14.40 $13.00 $10.06 $9.15 -$0.91 Source: September 2015 WASDE - USDA: WAOB. The September report increased old-crop soybean imports by 3 million bushels but also increased crush use by 25 million bushels and exports by 10 million bushels from the August report. USDA also cut residual use by 2 million bushels for a net reduction in ending-stocks of 30 million bushels to 210 million bushels (Table 4). The September report reduced soybean supplies by 9 million bushels as the increase in production was offset by the smaller carry-in. On the demand side, crush demand was increased by 10 million bushels but residual use was cut by 2 million bushels. The net change in stocks was a 20 million bushel decrease from the August report. However, the analysts were expecting USDA to reduce ending-stocks by an even larger amount so the September report was a little bearish. The projected U.S soybeans ending-stocks is 450 million bushels which is a 12.1% stocks-use ratio. Global soybean stocks-use is a projected 27.4% so the U.S. and world are not lacking for soybeans. Like in corn, the U.S. soybean market has rebuilt stocks from a 10 day supply for to a projected 44 day supply by the end of marketing-year (Table 4). The MYA price is projected at $9.15 per bushel which would be $0.91/bushel lower than the previous year s price, if realized (Table 4). Table 5. U.S. Wheat Supply and Use Change from Estimated Projected Projected Planted Acres (million) Harvested Acres (million) Yield (bushels/acre) Million Bushels Beginning Stocks Production 2,252 2,135 2,026 2, Imports Total Supply 3,118 3,021 2,765 3, Food Seed Feed and Residual Exports 1,012 1, Total Use 2,400 2,431 2,013 2, Ending Stocks Stocks/Use 29.9% 24.3% 37.4% 40.9% +3.5% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $7.77 $6.87 $5.99 $5.00 -$0.99 Source: September 2015 WASDE - USDA: WAOB. The September report made very minor adjustments to the old-crop wheat balance sheet by increasing imports by 5 million bushel but increased feed use by the same amount for no change in ending-stocks (Table 5). The September report made minor adjustments to the new-crop balance sheet on the demand side. Exports were reduced by 25 million bushels to 900 million bushels. Given the strong U.S. dollar and global competition for wheat, 900 million bushels might still be too high for wheat exports in Projected ending-stocks increased by 25 million bushels from August to 875 million bushels. This is a 40.9% stocks-use ratio and about 149 days of wheat inventory available at the end of the marketingyear. The projected U.S. MYA price is $5.00/bushel for If realized, this price would be $0.99/bushel lower than the U.S. MYA price (Table 5). Besides having abundant stocks domestically, world stocks of soybeans and wheat are projected to increase by 6.25 and 15.3 Million Metric Tons (MMT), respectively from World corn stocks are projected to decline by 7.5 MMT due to the projected reduction of U.S. corn stocks by 3.6 MMT. USDA projects that China s corn stocks will increase by 9 MMT and that China holds about 48% of the world s projected corn stocks which may temper their demand for corn. The issue with China is the age and quality of this corn and the Chinese government s willingness to allow importation of better quality corn to blend with the stored grain of lesser quality. 4

5 For soybeans, Argentina and Brazil are projected to have 39% and 21% of the world s ending-stocks, respectively. Both countries are storing as a hedge against inflation and a way to preserve monetary value. Still these soybeans will eventually enter the market and compete with U.S. soybeans. Topic 3. Crop Precipitation and Temperature Maps and Weather Outlook The following maps are provided to help managers gauge weather risk heading into crop maturity and harvest. Current 8 to 14 day outlook for precipitation (left) and temperature (right) are shown in the table below. The 8 10 day forecast, released September 16, is for below normal precipitation for the South and most of the Corn Belt. Most of this area will also experience above normal temperatures. Current one-month outlook for precipitation (left) and temperature (right) are shown in the table below. The one-month outlook, released September 17, is for normal precipitation in the Corn Belt and most of the Southern region and above normal temperatures. The forecast for warm and dry weather for Kentucky should help crops mature, dry and keep the combines rolling as harvest gets underway. 5

6 Topic 4. Comparing Harvest-Time and January Cash-Forward-Contract Bids and Managing Risk As corn and soybeans near maturity and you prepare for harvest, it is worthwhile to start thinking about how you want to market your un-priced grain. Current price levels suggest storing, especially if on-farm storage is available, will come closer to covering total economic costs than selling at harvest. Figure 1 shows the average October cash-forward-contract (CFC) corn price for Western Kentucky (blue bar) along with the January CFC bids (red bars). The green line is the per bushel cash total variable costs plus cash rent equal to $3.36/bushel. The black line is the per bushel total economic cost of $4.01/bushel. These costs are based on University of Kentucky budgets assuming the projected state average yield of 172 bushels/acre from the September Crop Production report. $4.70 $4.60 $4.50 $4.40 $4.30 $4.20 $4.10 $4.00 $3.90 $3.80 $3.70 $3.60 $3.50 $3.40 $3.30 $3.20 $3.10 $3.00 Figure 1. October and January Corn Cash Bids for 2015 with Per Bushel Costs. There have been limited pricing opportunities at levels that cover total economic costs. On September 11, the January CFC bid almost covered total economic costs. However, the storage costs from harvest to January are not incorporated in the analysis. Those with access to lower-cost storage will have the greater profitability and may cover total economic costs if yields are large enough to reduce the per unit cost. Figure 2 shows the average October CFC soybean price for Western Kentucky (blue bar) along with the January CFC bids (red bars). The green line is the per bushel cash total variable costs plus cash rent equal to $8.40/bushel. The black line is the per bushel total economic cost of $9.88/bushel. These costs are based on University of Kentucky budgets assuming the state average yield of 50 bushels/acre. Higher yields will have lower per unit costs. $11.00 $10.75 $10.50 $10.25 $10.00 $9.75 $9.50 $9.25 $9.00 $8.75 $8.50 $8.25 $8.00 $7.75 $7.50 $7.25 $7.00 Oct Jan Cash TVC+Rent + All Economic May 27 May 29 Jun 1 Jun 3 Jun 5 Jun 8 Jun 10 Jun 12 Jun 15 Jun 17 Jun 19 Jun 22 Jun 24 Jun 26 Jun 29 Jul 1 Jul 3 Jul 6 Jul 8 Jul 10 Jul 13 Jul 15 Jul 17 Jul 20 Jul 22 Jul 24 Jul 27 Jul 29 Jul 31 Aug 3 Aug 5 Aug 7 Aug 10 Aug 12 Aug 14 Aug 17 Aug 19 Aug 21 Aug 24 Aug 26 Aug 28 Aug 31 Sep 2 Sep 4 Sep 7 Sep 9 Sep 11 Oct Jan TVC+Rent + All Economic May 27 May 29 Jun 1 Jun 3 Jun 5 Jun 8 Jun 10 Jun 12 Jun 15 Jun 17 Jun 19 Jun 22 Jun 24 Jun 26 Jun 29 Jul 1 Jul 3 Jul 6 Jul 8 Jul 10 Jul 13 Jul 15 Jul 17 Jul 20 Jul 22 Jul 24 Jul 27 Jul 29 Jul 31 Aug 3 Aug 5 Aug 7 Aug 10 Aug 12 Aug 14 Aug 17 Aug 19 Aug 21 Aug 24 Aug 26 Aug 28 Aug 31 Sep 2 Sep 4 Sep 7 Sep 9 Sep 11 Figure 2. October and January Soybean Cash Bids for 2015 with Per Bushel Costs. Soybeans have been providing pricing opportunities with the October CFC that covered total cash variable costs plus cash rent since May 27. The profit margin has declined significantly from July 13 where it may have been possible to cover total economic costs with an October CFC or a January CFC on August 10. Like in corn, there are limited opportunities to cover total economic costs even with a January CFC. Managers need to pencil out cost of storage and compare to potential returns. 6

7 Now is a good time to look at your production expenses, estimate your production, and update your pricing objectives given what you know about your expenses and expected production. Managers need to fully understand their per bushel costs to guide their marketing. Spot prices tend to decline into harvest so managers should determine the amount of production in excess of available on-farm storage and analyze pricing alternatives rather than selling off of the combine into the spot market. Topic 5. Comparing Storage Costs and Spot Price Appreciation from October to Spring and Summer As harvest gets underway, it is worthwhile to compare the cost of storing corn and soybeans on-farm to the cost of off-farm storage through a delayed pricing (DP) contract. An alternative to either storage method is to sell at harvest and to re-own the crop on paper by buying commodity futures contracts. This analysis will compare the cost of each method for three different storage lengths to identify when one method may become more expensive than the others. On-farm storage costs are estimated using research from Kansas State University (MF2474) and the University of Illinois analysis (farmdoc daily 4(179)). It is assumed that 1% moisture is removed with the same drying cost on-farm as off-farm. Corn stored on-farm has a shrink of 1% plus 0.1% per month stored. The shrink for off-farm stored grain is 1.4%. The interest cost reflects the opportunity cost of delayed revenue. The corn crop could have been sold at harvest for $3.65/bushel with revenue used to pay debt or to earn a return elsewhere. A 5% annual interest rate is assumed with the opportunity cost compounding monthly from October until the sales date. Low-debt farms may have a lower opportunity cost. Conversely, farms with debt at interest rates greater than 5% have a higher opportunity cost. The opportunity cost is the same for on-farm and off-farm storage. The variable cost of on-farm grain handling and conditioning is assumed to be $0.075/bushel based on analysis at Kansas State. Perhaps this cost will be greater when corn is stored into late spring and summer as more aeration will needed to keep the grain in condition. However, this cost is kept constant for simplicity in this analysis. The off-farm storage fee is modeled by a DP contract. A flat fee of $0.35/bushel is charged from October until January 31, Then the additional charge is 0.04/month. This is based on conversations with elevators in Western Kentucky. (Table 6) The Futures column is the cost of selling corn at harvest and owning the crop on paper. This alternative has two costs. One is the commission which is assumed to be $25 per 5,000 bushel futures contract. The second cost is the basis appreciation which is foregone by selling the crop at harvest. The basis appreciation is the revenue foregone by not storing and selling later at a higher price. The basis is assumed to appreciate by $0.25, $0.40, and $0.50/bushel for sales in January, April and June, respectively (Table 6). Table 6. Comparison of On-Farm, Off-Farm and "Paper Ownership" of Western Kentucky Corn Storage Alternatives for October 2015 through January 2016 October 2015 through April 2016 October 2015 through June 2016 On-farm Off-farm Futures On-farm Off-farm Futures On-farm Off-farm Futures Drying 1/ $0.035 $0.035 $0.035 $0.035 $0.035 $0.035 Shrink 2/ $0.051 $0.051 $0.062 $0.051 $0.069 $0.051 Interest 3/ $0.061 $0.061 $0.106 $0.106 $0.137 $0.137 Handling/Conditionng 4/ $0.075 $0.075 $0.075 Storage Fee 4/ $0.350 $0.470 $0.550 Futures Commission 5/ $0.005 $0.005 $0.005 Basis Appreciation 6/ $0.250 $0.400 $0.500 Total $0.222 $0.497 $0.255 $0.279 $0.663 $0.405 $0.316 $0.773 $0.505 Harvest Price $3.65 $3.65 $3.65 $3.65 $3.65 $3.65 1/ Drying cost is $0.035 per point removed for both on-farm and off-farm storage. 2/ Shrink of 1% per point of moisture removed plus 0.1%/month stored on-farm. Shrink for off-farm storage is 1.4% per point of moisture removed. 3/ Interest is 5% per year. For $3.65 corn, this is $0.015/month. 4/ Commercial storage is $0.35 until January 31 and is then charged an additional $0.04/month. Variable costs of on-farm storage is $ / Futures commission is $25 per 5,000 bushel contract. 6/ March Corn basis is expected to appreciate $0.25 from October to end of January. May corn is expected to appreciate $0.40 from October to end of April. July corn is expected to appreciate $0.50 from October to end of June. Table 6 is a reminder that on-farm storage systems are both a great source of income tax depreciation as well as the lowest cost storage alternative regardless of when the crop is sold. The total on-farm storage cost for sales in January, April and June are $0.222, $0.279 and $0.316 per bushel, respectively. The opportunity cost is about 25% of 7

8 the total storage cost when selling in January but is over 40% of the on-farm storage cost for the June sales date (Table 6). That is an important, but sometimes forgotten, cost of storing grain. The off-farm storage cost is $0.497, $0.663, and $0.773 per bushel for the January, April and June pricing dates, respectively (Table 6). To make this storage method profitable, the basis will need to appreciate more than expected to fully cover all of the storage costs. This analysis uses long-term average basis appreciation for Western Kentucky of $0.25, $0.40 and 0.50 per bushel, respectively, for the January, April and June pricing dates. With average levels of basis, appreciation, off-farm storage would not be profitable. Buying futures contracts are a lower-cost form of storage than off-farm storage. However, this alternative has a couple of tax consequences not included in the analysis. The first is the impact of selling a larger share of the crop at harvest instead of deferring this revenue into the next tax year. The second tax consideration is that buying futures contracts to own the crop is a speculative position and any profits or loss will be treated differently than business income or expense. It is important you consult your tax advisor to understand the impact of not deferring corn sales or speculation on your total tax liability. Table 7 reports the analysis of on-farm, off-farm and futures storage alternatives for soybeans. Three sales periods are considered October through January; October through April; and October through June. Shrink is assumed to be 0.25% for on-farm storage and 0.5% for off-farm storage. The opportunity cost is calculated at 5% annual interest assuming a harvest price of $8.80/bushel and is the same for on-farm and off-farm storage. On-farm handling/conditioning is $0.075/bushel regardless of when soybeans are sold. The off-farm storage fee is modeled by a DP contract. The storage fee is $0.20/bushel from October through January. An additional charge of $0.04/month is charged after January. Basis is assumed to appreciate $0.35 from October through January; $0.74/bushel from October through April; and $0.30 from October through June (Table 7). Table 7. Comparison of On-Farm, Off-Farm and "Paper Ownership" of Western Kentucky Soybean Storage Alternatives for October 2015 through January 2016 October 2015 through April 2016 October 2015 through June 2016 On-farm Off-farm Futures On-farm Off-farm Futures On-farm Off-farm Futures Shrink 1/ $0.022 $0.044 $0.022 $0.044 $0.022 $0.044 Interest 2/ $0.147 $0.147 $0.257 $0.257 $0.330 $0.330 Handling/Conditionng 3/ $0.075 $0.075 $0.075 Storage Fee 3/ $0.200 $0.320 $0.400 Futures Commission 4 / $0.005 $0.005 $0.005 Basis Appreciation 5/ $0.350 $0.740 $0.300 Total $0.244 $0.391 $0.355 $0.354 $0.621 $0.745 $0.427 $0.774 $0.305 Harvest Price $8.80 $8.80 $8.80 $8.80 $8.80 $8.80 1/ On-farm shrink of 0.25%. Shrink for off-farm storage is 0.5%. 2/ Interest is 5% per year. For $3.65 corn, this is $0.015/month. 3/ Commercial storage is $0.20 until January 31. An additional $0.04/month is charged after January. Variable costs of on-farm storage is $ / Futures commission is $25 per 5,000 bushel contract. 5/ March soybean basis is expected to appreciate $0.35 from October to end of January. May soybean basis is expected to appreciate $0.74 from October to end of April. July soybean basis is expected to appreciate $0.30 from October to end of June. As in corn, on-farm storage is the low-cost storage alternative (Table 7) by a wide margin when the soybean crop is sold prior to May 1 st. The opportunity cost is a significant component of the cost of on-farm storage as it is about 60% of the storage cost for sales in January and increases to over 77% of the total storage cost for sales in June (Table 7). The example also suggests that it is not profitable to store soybeans into June if basis only appreciates by $0.30 as greater appreciation is needed ($0.42 and $0.77) to cover on-farm and off-farm storage, respectively (Table 7). In this example, it appears to be better to sell in April for both on-farm and off-farm storage if basis appreciates as expected. The off-farm storage, as modeled by the DP contract, might be profitable if basis appreciates as expected into April. In this analysis, the basis doesn t appreciate enough for commercial storage to be profitable for the January sales or the June sales example. Waiting until April to sell soybeans could be a risky strategy given this year s large increase in domestic soybean stocks coupled with South American soybean harvest that will be underway in April that will bring even more soybeans into the global market. Both fundamentals could dampen basis appreciation. In summary, now is time to compare your off-farm storage alternatives to understand the full cost of storing corn and soybeans beyond harvest. This decision may have tax implications if you are considering selling a larger percentage of your crop at harvest than normal. Those considering futures speculation should also visit with a tax expert to better understand your total tax liability. 8

9 The other side of the storage-cost coin is analyzing how spot prices tend to appreciate from harvest into the spring or early summer to understand potential returns to storage. The past ten years have witness impressive appreciation in spot prices from the traditional October harvest-time low into spring and summer. This decade benefited from strong domestic demand for corn for biofuel and soybeans for export. This period also had three consecutive years with below-trend yields that contributed to persistently tight levels of ending-stocks. Table 8 summarizes the change in the Western Kentucky spot corn price from the average value at harvest (October) to the average in January through July. These prices do not include any storage costs, opportunity cost, shrink or drying costs. You can see in Table 8 that the 2010 marketing-year ought to be remembered fondly but then stricken from your memory as the appreciation in prices reflect the tight-stocks in the corn market as the amount of ending-stocks decreased by 34% from the previous marketing-year. That is an atypical marketing-year. Similarly, the 2012 marketing-year shows price depreciation from harvest into spring and summer. Recall that the price premium from the 2012 drought was evaporating throughout the spring and summer in 2013 as the market became convinced of stocks being rebuilt. The 2013 corn crop increased ending-stocks by 50% from the previous marketing-year which drove the elimination of the price risk premium. Table 8 suggests that the best returns to storage might be in February or March based on the average from This is a change from the average where the best returns to storage might have been in May/June. Understanding your storage costs is critical to measure storage returns and when it is no longer economical to store grain. Marketing Table 8. Change in Western Kentucky Spot Corn Price from October to: % Change in Year Jan Feb Mar Apr May Jun Jul Engding Stocks Avg. +$0.61 +$0.68 +$0.73 +$0.77 +$0.88 +$1.02 +$ % $1.05 +$1.68 +$1.72 +$2.36 +$2.13 +$2.27 +$ % $0.14 +$0.29 +$0.40 +$0.23 +$0.26 +$0.03 +$ % $0.19 -$0.12 +$0.03 -$0.69 -$0.41 -$0.31 -$ % $0.17 +$0.40 +$0.68 +$0.93 +$0.93 +$0.56 -$ % $0.92 +$0.93 +$0.99 +$0.89 +$0.82 +$0.83 +$ % Average +$0.42 +$0.64 +$0.76 +$0.75 +$0.75 +$0.67 +$ % for Table 9 summarizes the change in the Western Kentucky spot soybean price from the average value at harvest (October) to the average in January through July. These prices do not include any storage costs, opportunity cost, or shrink. Like in corn, the unique fundamentals that kept soybean stocks persistently tight provided substantial appreciation in the spot price from October into summer. The average suggested average price appreciation of $2.25/bushel from October to June (Table 9). That average level of appreciation was not achieved for the average period. The other lesson could be the best potential return to storage could be in the March to May period instead of holding into summer. Marketing Table 9. Change in Western Kentucky Spot Soybean Price from October to: % Change in Year Jan Feb Mar Apr May Jun Jul Ending Stocks Avg. +$1.21 +$1.32 +$1.24 +$1.30 +$1.67 +$2.25 +$ % $2.60 +$2.75 +$2.27 +$2.34 +$2.34 +$2.50 +$ % $0.10 +$0.57 +$1.54 +$2.37 +$2.43 +$2.24 +$ % $0.73 -$0.40 -$0.54 -$0.95 -$0.25 +$0.25 +$ % $0.47 +$0.75 +$1.38 +$2.03 +$2.18 +$1.82 +$ % $0.73 +$0.59 +$0.56 +$0.38 +$0.33 +$0.40 +$ % Average +$0.64 +$0.85 +$1.04 +$1.23 +$1.41 +$1.44 +$ % for The market fundamentals from of demand pulling prices higher coupled with tight stocks unique pricing opportunities and return to storage. As the soybean stocks are recharged from the 2012 drought and soybeans are harvesting the second consecutive record crop, managers will need to monitor their storage costs and analyze if the market will reward storing soybeans into late spring or early summer. 9

10 Topic 6. Corn and Soybean Storage Risk Management Alternatives Previous newsletters have focused on pre-harvest price risk management for corn and soybeans. As harvest is getting underway, we will switch the focus on the alternatives available in managing price risk for stored grain. We have already talked about cash-forward contracts for storing grain into January. Let s look at the alternatives available if corn and soybeans are stored into March. The black dashed line in Figure 3 is the per bushel total variable cash cost + cash rent + on-farm storage cost from October to March assuming a harvested yield of 172 bushels/acre. These costs are based on the 2015 crop enterprise budgets for Western Kentucky with an emphasis on covering cash costs. Ideally you would strive to cover total economic costs plus provide a return for family living, debt payments, management and future business growth. Consider the black line at $3.60/bushel a minimum price needed to cover the cash costs of farming and storing grain. Cash-forward contracts for March delivery are scarce on DTN but a few in the region were listed at an average of $4.09/bushel which would be a $0.49/bushel return over total cash variable costs, rent and storage. Similarly, a hedge with March futures would lock in a price at $3.95 and a return of $0.35/bushel over the pricing objective. A just-in-the-money put option with a $4 strike price would place a floor $0.12/bushel above the objective put provide flexibility to benefit from higher prices if March futures rally between now and the end of February 2016 (Figure 3). Cash CFC Futures Put TVC+Rent+Storage $5.25 $5.00 $4.75 $4.50 $4.25 A March cash-forward-contract (red line) at $4.09 would provide a $0.49/bushel return over total cash variable costs, rent and storage (black line at $3.60/bushel). Hedging with a March Futures contract at $3.98 will lock in a cash price of $3.95/bushel at an expected basis of - $0.03/bushel. This hedge would lock in a return of $0.35/bushel A just-in-the money put at a $4 strike price costs $0.25 and will lock in a floor of $0.12/bushel. When March Futures are at $4.23, the put is better than the hedge. When March Futures are at $4.37, the put is better than the CFC. Cash Price $4.00 $3.75 $3.50 $3.25 $3.00 $2.75 $2.50 $3.00 $3.20 $3.40 $3.60 $3.80 $4.00 $4.20 $4.40 $4.60 Futures Price Figure 3. Comparison of Price Risk Management Alternatives for Storing Corn from October 2015 to March Price risk management alternatives for soybeans are illustrated in Figure 4. The pricing objective of $8.68/bushel will cover the per bushel cash total variable production costs, cash rent and on-farm storage from October to March based on the state average yield of 50 bushels/acre. A few locations were offering a CFC for March 2016 at $9.04/bushel which would be a $0.36/bushel return (red line). Similarly, hedging with March soybean futures would lock in a price at $8.95 assuming a basis of +$0.07/bushel which would be a $0.27 return over the pricing objective. A just-in-the money put with a $9 strike price costs $0.47/bushel and would provide a floor that is -$0.07 below the pricing objective. When March futures are at $9.28/bushel or higher, the put option is better than the hedge. Similarly, when March futures at $9.44/bushel or higher, a put is better than the CFC. Harvest is a hectic time as you race to get the crops out of the field and into storage. It is important to not forget the pricing function of storage and to consider risk management protection that meets your pricing objectives whenever they are available. 10

11 Cash CFC Futures Put TVC+Rent+Storage $12.00 $11.50 $11.00 $10.50 $10.00 A March cash-forward-contract (red line) at $9.04 would provide a $0.36/bushel return over total cash variable costs, rent and storage (black line at $8.68/bushel). Hedging with a March Futures contract at $8.88 will lock in a cash price of $8.95/bushel at an expected basis of +$0.07/bushel. This hedge would lock in a return of $0.27/bushel A just-in-the money put at a $9 strike price costs $0.47 and will lock in a floor with a loss of -$0.07/bushel. However, when March Futures are at $9.28, the put is better than the hedge. When March Futures are at $9.44, the put is better than the CFC. Cash Price $9.50 $9.00 $8.50 $8.00 $7.50 $7.00 $6.50 $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 $11.00 Futures Price Figure 4. Comparison of Price Risk Management Alternatives for Storing Soybeans from October 2015 to March Topic 7. How Do I Get on the Distribution List to Receive this Newsletter? If you would like to receive each month s newsletter by , send an to todd.davis@uky.edu and request to be added to the distribution list. The Crops Marketing and Management Update is published monthly usually after the release of the USDA: WASDE report. You can find this issue and past issue on the UK Agricultural Economics Department s website at: Todd D. Davis Assistant Extension Professor Extension Economist Crop Economics Marketing & Management Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, AND KENTUCKY COUNTIES, COOPERATING 11