Crops Marketing and Management Update

Transcription

1 Crops Marketing and Management Update Grains and Forage Center of Excellence Dr. Todd D. Davis Assistant Extension Professor Department of Agricultural Economics Vol (10) October 16, 2016 Topics in this Month s Update: 1. October 12 th Crop Production Report Confirms Record Large Corn and Soybean Crops 2. October 12 th WASDE Update: It Could Have Been Worse 3. Comparing Harvest-Time and January Cash-Forward-Contract Bids and Managing Risk 4. Corn and Soybean Storage Risk Management Alternatives to May Projected Returns to On-Farm and Off-Farm Storage for Corn and Soybeans 6. How Do I Get on the Distribution List to Receive this Newsletter? Topic 1. October 12 th Crop Production Report Confirms Record Large Corn and Soybean Crops The October Crop Production report includes updated yield projections that incorporate actual harvested yields as well as an acreage updated based on FSA certified acreage data. Anecdotal evidence across the country is that corn yields are not as large as previously forecasted while soybeans are yielding better than projected. A prereport survey of analysts projected yields at and 51.4, respectively, for corn and soybeans. The October Crop Production report didn t contain any surprises as the analysts were accurate in predicting the corn and soybean yields. The report increased planted and harvested area for corn and decreased acreage for wheat but not enough to cause a market reaction. The reports did confirm that in spite of a less than perfect growing season, the US is producing a record corn and soybean crop and the largest wheat crop since The October report increased corn yields by 2 bushels per acre (bpa) in Illinois (202 bpa), Iowa (198 bpa), Minnesota (186 bpa), North Dakota (137 bpa), and Wisconsin (171 bpa) from the September projections. In addition, Illinois, Iowa, North Dakota and Wisconsin would harvest record corn yields, if realized. Illinois, Indiana and Missouri are projected to have much larger yields up by 27, 27 and 23 bushels per acre, respectively, from last year The report did trim the Indiana yield by 8 bushels to 177 bpa from the September projections. The Midwest states are projected to harvest 3.62 million more acres this year than last year. With much higher yields than last year in the core corn producing states, the Midwest corn crop is pegged at billion bushels which is up 1.13 billion bushels from 2015 (Table 1). The Southern region increased corn harvested area by 1.98 million acres from 2015 (Table 1) but the region is not projected to repeat the 2015 corn yields. Yields are lower throughout the South with the exception of North Carolina, South Carolina and Georgia. The increase in acreage will off-set the lower yields with the Southern corn crop projected at 1.38 billion bushels which is 265 million more bushels than last year (Table 1). USDA trimmed 10 bushels off of the Kentucky state average yield with the current yield projected at 162 bushels/acre. Corn harvested area is up 100 thousand acres from 2015 which offsets the lower yield. The 2016 Kentucky corn crop is projected at 228 million bushels up 3 million bushels from last year (Table 1). The 2016 US corn crop is a projected record billion bushels which is 1.45 billion bushels larger than the 2015 crop. The 2012 drought year is a distant memory as the US has produced the four largest crops on record since the drought year. The onus will be on use to keep corn ending stocks from becoming burdensome. 1

2 Table 1. Corn Harvested Area, Yield and Production for 2016 (F) and 2015 for Midwestern and Southern States. Harvested Area (1,000) Change in Yield (Bu/Acre) Change in Production (Million Bushels) Change in 2016 (F) 2015 Acres 2016 (F) 2015 Yield 2016 (F) 2015 Production Midwest States Illinois 11,500 11, ,323 2, Indiana 5,410 5, Iowa 13,500 13, ,673 2, Kansas 4,850 3, Michigan 2,160 2, Minnesota 8,000 7, ,488 1, Missouri 3,550 3, Nebraska 9,500 9, ,720 1, North Dakota 3,250 2, Ohio 3,290 3, South Dakota 5,210 5, Wisconsin 3,100 3, Midwest Total 73,320 69,700 +3,620 13,070 11,933 +1,138 Southern States Alabama Arkansas Georgia Kentucky 1,410 1, Louisiana Mississippi North Carolina Oklahoma South Carolina Tennessee Texas 2,500 1, Virginia South Total 9,410 7,435 +1,975 1,382 1, Other States United States 86,836 80,749 +6, ,057 13,601 +1,456 The October Crop Production report made the largest soybean yield changes along the edge of the core production region. The report increased projected yields in North Dakota (4 bpa to 39 bpa), North Carolina (3 bpa to 38 bpa) and South Dakota (3 bpa to 46 bpa). The report also increased Illinois and Indiana yields by 1 bpa to 62 and 59 bpa, respectively (Table 2). The Midwest also increased harvested area from 2015 with area increased in Missouri (up 1.08 million acres), Illinois (up 330 thousand), North Dakota (up 290 thousand) and Indiana (up 180 thousand acres). USDA is currently projecting record soybean yields in Illinois, Indiana, Iowa, Kansas, Kentucky, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. The Midwest soybean crop is projected at 3.58 billion bushels which would be an increase of 344 million bushels over 2015, if realized (Table 2) Table 2. Soybean Harvested Area, Yield and Production for 2016 (F) and 2015 for Midwestern and Southern States. Harvested Area (1,000) Change in Yield (Bu/Acre) Change in Production (Million Bushels) Change in 2016 (F) 2015 Harvested Acres 2016 (F) 2015 Yield 2016 (F) 2015 Production Illinois 10,050 9, Midwest States Indiana 5,680 5, Iowa 9,500 9, Kansas 4,010 3, Michigan 2,090 2, Minnesota 7,550 7, Missouri 5,550 4,470 +1, Nebraska 5,150 5, North Dakota 6,010 5, Ohio 4,840 4, South Dakota 5,170 5, Wisconsin 1,950 1, Midwest Total 67,550 65,640 +1,910 3,580 3, Southern States Alabama Arkansas 3,120 3, Georgia Kentucky 1,790 1, Louisiana 1,210 1, Mississippi 2,030 2, North Carolina 1,670 1, Oklahoma South Carolina Tennessee 1,640 1, Texas Virginia South Total 13,750 14, Other States United States 83,047 81,732 +1, ,269 3,

3 The Southern region mostly reduced soybean acres in 2016 with projected yields in the major soybean states offsetting lower yields experienced across the region. The South is projected to produce 613 million bushels of soybeans which is 6 million bushels less than in 2015, if realized (Table 2). The US soybean crop has broken the 4-billion-bushel barrier. The US Crop is projected at billion bushels up 343 million over As in corn, the impact of the 2012 drought has faded as the three largest crops on record have been produced the last three years. Again, use must remain strong to absorb these large crops to keep stocks from blooming to a burdensome level. Topic 2. October 12 th WASDE Update: It Could Have Been Worse When talking about the balance sheets for corn and soybeans, it becomes repetitive to keep typing record. Yet, this is the market environment with the balance sheets for corn and soybeans facing record yields, record production, and record supplies. Table 3. U.S. Corn Supply and Use Change from Estimated Projected Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks 821 1,232 1,731 1, Production 13,829 14,216 13,601 15,057 +1,456 Imports Total Supply 14,686 15,479 15,400 16,845 +1,445 Feed and Residual 5,040 5,323 5,192 5, Food, Seed & Industrial 6,493 6,560 6,573 6, Ethanol and by-products 5,124 5,200 5,206 5, Exports 1,920 1,864 1,898 2, Total Use 13,454 13,748 13,662 14, Ending Stocks 1,232 1,731 1,738 2, Stocks/Use 9.2% 12.6% 12.7% 16.0% +3.3% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $4.46 $3.70 $3.61 $3.25 -$0.36 Source:October 2016 WASDE - USDA: WAOB. The corn balance sheet adopts the Grain Stocks estimate of ending stocks at billion bushels. To get to this number, the October WASDE reduced old-crop exports and feed use projections by 17 million and 8 million bushels, respectively, from the September report. USDA also increased ethanol use by 6 million bushels which reflects the profitability of the ethanol processing sector. The new crop estimates increased planted and harvested area by 400 thousand and 200 thousand acres, respectively, from the previous report. This partially offset the lower yield projections which trimmed the size of the 2016 corn crop by 36 million bushels. Still, the 2016 corn crop is projected to be billion bushels larger than last year. The record supply of billion bushel is also 1.45 billion bushels larger than last year s supply (Table 3). USDA is projecting use to increase by 863 million bushels from last year with exports increased by 327 million to which would be the largest level of exports since , if realized. Similarly, ethanol use is projected to increase by 69 million bushels to billion bushels. Feed and residual is also projected to increase by 458 million bushels with part of this increase reflecting the measurement error involved with record corn crops (Table 3). Ending stocks are projected to increase by 582 million bushels to 2.32 billion bushels which would be the largest since The stocks-use ratio, at 16.8%, reflects that demand is very strong and is needed to keep prices from singing even lower. The U.S. marketing-year average (MYA) farm price is projected at $3.25/bushel with a range of $2.95 to $3.55 per bushel (Table 3). Is there anything optimistic in the corn market? The corn market has much greater demand than in The stocks-use ratio was about 55% in and the 1988 drought provided the mechanism to reduce stocks that could not be reduced by acreage supply control and other farm programs of that era. The October report projects global corn stocks to increase by 6.76 MMT with the US contributing 14.8 MMT to this increase. Argentina and Brazil are projected to increase stocks by 1.01 and 0.6 MMT, respectively. Both countries are just starting their growing season so these projections are pretty tenuous. China is projected to reduce 3

4 their corn stocks by 7.02 MMT as part of their program to sell stocks and motivate production of other crops. Even with this reduction, China is projected to hold about 48% of the World s corn inventory. Table 4. U.S. Soybean Supply and Use Change from Estimated Projected Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks Production 3,358 3,927 3,926 4, Imports Total Supply 3,570 4,052 4,140 4, Crushings 1,734 1,873 1,886 1, Exports 1,638 1,843 1,936 2, Seed Residual Total Use 3,478 3,862 3,943 4, Ending Stocks Stocks/Use 2.6% 4.9% 5.0% 9.6% +4.6% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $13.00 $10.10 $8.95 $9.05 +$0.10 Source:October 2016 WASDE - USDA: WAOB. For soybeans, USDA increased old-crop ending stocks by 2 million bushels through a reduction in old-crop exports and adjustments to residual use and 2015 harvested area. The 2016 soybean crop was increased by 68 million bushels due to the 0.8 bushel/acre increase in yield. The 2016 soybean supply is projected to increase 356 million bushels from last year. Total use is projected to increase by 158 million bushels with exports leading the way. Projected exports of billion bushels will be a record if realized. Crushing is also projected to increase to 1.95 billion bushels over last year. Ending soybean stocks are currently projected at 395 million bushels which would be the largest level since 2006 (Table 4). As in corn, the stocks-use ratio of 9.6% may weigh heavy on price if the use projections do not materialize. The US MYA price is projected at $9.05 with a range of $8.30 to $9.80 per bushel (Table 4). Soybeans benefit from much stronger use than in The current projected stocks-use of 9.6% is almost half of the 2006 stocks-use ratio. This strong use is also reflected in the global soybean stock projections. USDA projects global soybean stocks increasing by 1.9 MMT for The US is projected to contribute 5.38 MMT to the global increase in stocks. Argentina and Brazil are both projected to reduce stocks by 1.1 and 0.15 MMT, respectively, from last year. Both countries experienced weather events in 2015 that reduced the size of the corn and soybean crops. Argentina is enacting policy changes to stimulate production of non-soybean crops. Brazil farmers have credit and profitability problems coupled with weather risk which may curb their production of both corn and soybeans. Table 5. U.S. Wheat Supply and Use Change from Estimated Projected Planted Acres (million) Harvested Acres (million) Yield (bushels/acre) Million Bushels Beginning Stocks Production 2,135 2,026 2,062 2, Imports Total Supply 3,026 2,766 2,927 3, Food Seed Feed and Residual Exports 1, Total Use 2,436 2,014 1,952 2, Ending Stocks , Stocks/Use 24.2% 37.3% 50.0% 50.1% +0.1% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $6.87 $5.99 $4.89 $3.70 -$1.19 Source:October 2016 WASDE - USDA: WAOB. For wheat, USDA reduced old-crop ending stocks by 5 million bushels but that was only a moral victory. The 2016 wheat crop is projected at 2.3 billion bushels due to record wheat yields offsetting the 3.4 million area reduction in harvested area. Total wheat supply is projected to increase 483 million bushels from last year with total use increasing only by 320 million bushels. Wheat exports are projected to increase 200 million bushels from last year but are still 201 million bushels less than the marketing-year exports. Feed use is projected to increase 108 million bushels from last year reflecting the quality problems of the 2016 crop. Wheat prices will be in a race to the bottom to compete with cheap corn. 4

5 Wheat stocks are projected to be the largest since at billion bushels. The stocks-use ratio, at 50.1%, is projected to be the largest since which was at 83%. As in corn, the 1988 drought was the mechanism that reduced the burdensome level of wheat stocks. The US MYA price is projected at $3.70 which would be $1.19/bushel lower than the 2015 MYA price (Table 5). It is easy to talk about strong global demand for corn and soybeans. That story is more challenging for wheat. Global wheat stocks are projected to increase by 8.7 MMT with the US contributing 4.4 MMT to that increase. The other major exporters in the Northern and Southern hemisphere are also projected to increase stocks and their exportable surplus. Wheat has a much harder row to hoe in working through the burdensome domestic stocks. A weather event is the most-likely mechanism that will reduce stocks. Price is trying to discourage 2017 wheat production. Only time will tell how price and weather collaborate in reducing the 2017 crop. The October report for corn and soybeans can be summarized as It could have been worse. The December 2016 corn futures contract closed $0.08 ½ lower the day of the report but then worked higher and closed on October 14 at $3.54 ¼ which is the highest close since July 18. Similarly, November 2016 soybean futures closed $0.08 ¾ lower on the report day but then rallied on Thursday and Friday to close at $9.62 ½. The higher closes are surprising given the prospect of record crops and increasing stocks. The rally is due to unprofitable speculative positions of those anticipating even more bearish news in the October reports. These short positions that were not profitable were offset and the market pushed higher. The export projections will be supportive until South America harvests their crops in early A weather event in the Argentina and Brazil could extend and enhance the period of strong exports and provide even better pricing opportunities. Conversely, large crops in South America should be a signal to price stored corn and soybeans before market fundamentals pressure prices lower. Topic 3. Comparing Harvest-Time and January Cash-Forward-Contract Bids and Managing Risk Some managers plan on storing until the New Year to defer taxable income. January sales are sometimes made based on cash flow needs rather than returns to storage. Managers should understand the per bushel costs needed to cover production costs plus storage. Some may want to use forward contract on a percentage of expected production to reduce revenue risk if the price is at a profitable level. Let s look at current harvest-time and January cash forward-contract (CFC) bids and compare the potential prices to budgeted variable costs, land rent, fixed costs, and a minimum storage cost from October harvest to January. The production costs, fixed costs and land rent are from University of Kentucky budgets for Western Kentucky assuming harvested yields of 162 bushels and 50 bushels, respectively, for corn and soybeans based on the October Crop Production estimates. The minimum storage costs include the opportunity cost of deferred revenue at harvest (5% annual interest), shrink (1.25% corn, 0.25% soybean) and $0.10 per bushel cost of additional handling and labor to move grain in and out of storage. These cost estimates do not include any utilities expense for fans or on-farm drying. These are bare minimum costs of on-farm storage from harvest to January. The minimum costs are assumed at $0.18/bushel for corn and $0.26/bushel for soybeans. Figure 1 compares the October corn CFC (blue column), January CFC (red column) to production costs plus rent (black line), overhead costs (green line) and minimum storage costs to January (red line). While not covering total costs, the July 18 th January CFC provided the last best risk management opportunity. As prices have worked lower, managers need to know per bushel costs to accurately set pricing objective. Current bids are well below the cost of overhead and storage to January 2017 (Figure 1). The soybean pricing opportunities for fall delivery has been limited since August 17 where there was potential to cover total economic costs with a harvest CFC sale (Figure 2). As bids for harvest and January delivery have declined, there is limited opportunity to lock in a January CFC bid that would cover total economic costs plus the minimum storage costs. Managers considering early 2017 delivery should establish pricing objectives and monitor the market for opportunities to lock in profitable prices when they are available. 5

6 $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 $2.90 $2.80 $2.70 $2.60 $2.50 July 11 Harvest January TVC+Rent +Fixed Costs +Min Storage July 14 July 19 July 22 July 27 Aug 1 Aug 4 Aug 9 Aug 12 Aug 17 Aug 22 Figure 1. October 2016 and January 2017 Corn Cash Bids with Per Bushel Costs. Aug 25 Aug 30 Sep 2 Sep 8 Sep 13 Sep 16 Sep 21 Sep 26 Sep 30 Oct 5 Oct 10 Oct 13 $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 July 11 Harvest January TVC+Rent +Fixed Costs +Min Storage July 14 July 19 July 22 July 27 Aug 1 Aug 4 Aug 9 Aug 12 Aug 17 Figure 2. October 2016 and January 2017 Soybean Cash Bids with Per Bushel Costs. Aug 22 Aug 25 Aug 30 Sep 2 Sep 8 Sep 13 Sep 16 Sep 21 Sep 26 Sep 30 Oct 5 Topic 4. Corn and Soybean Storage Risk Management Alternatives to February 2017 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 to February The black dashed line in Figure 3 is the per bushel total variable cash cost + cash rent + on-farm storage cost from October through February assuming a harvested yield of 162 bushels/acre which is the Kentucky state average yield from the October Crop Production report. These costs are based on the 2016 crop enterprise budgets for Western Kentucky with an emphasis on covering cash costs, cash rent and storage. 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 $3.90/bushel a minimum price needed to cover the cash costs of farming and storing grain on-farm. Cash CFC Futures Put TVC+Rent+Storage $5.25 $5.00 $4.75 $4.50 $4.25 Cash Price $4.00 $3.75 $3.50 $3.25 $3.00 $2.75 $2.50 $2.80 $3.00 $3.20 $3.40 $3.60 $3.80 $4.00 $4.20 $4.40 Futures Price Figure 3. Comparison of Price Risk Management Alternatives for Storing Corn from October 2016 to February Cash forward-contracts for February delivery (red line) are scarce on DTN but a few in the region were listed at an average of $3.55/bushel which would be a -$0.35/bushel return over the pricing objective. Similarly, a hedge with March futures (green line) at $3.64/bushel would lock in a price at $3.69 assuming a basis of +$0.05/bushel in February. This hedge would lock in a return of -$0.21/bushel over the pricing objective. A just-in-the-money put option (orange line) with a $3.70 strike price costs $0.22 and would create a floor at $3.53/bushel and a - $0.37/bushel return. When March futures are at $3.72, the put is better than the CFC. The put is better than the hedge when March futures are at $3.86 or higher. Remember that the March put expires on February 24, 2017, so risk coverage ends on that date (Figure 3). Price risk management alternatives for soybeans are illustrated in Figure 4. The pricing objective of $9.14/bushel will cover the per bushel cash total variable production costs, cash rent and on-farm storage from 6

7 October to February based on the Kentucky state average yield of 50 bushels/acre from the October Crop Production report. A few locations are offering a CFC for February 2017 at $9.60/bushel which would be a $0.46/bushel return (red line). Similarly, hedging with March soybean futures (green line) would lock in a price at $9.81 assuming a basis of +$0.05/bushel. The hedge would be a $0.67 return over the pricing objective. A just-in-the money put (orange line) with a $9.80 strike price costs $0.43/bushel and would provide a floor at $9.42 which is $0.28/bushel above the pricing objective. When March futures are at $10.14/bushel or higher, the put option is better than the hedge. The put is better than the CFC when March futures are at $9.98/bushel or higher. The March 2017 soybean put option expires February 24, 2017, which will end the risk protection (Figure 4). $12.00 Cash CFC Futures Put TVC+Rent+Storage Cash Price $11.50 $11.00 $10.50 $10.00 $9.50 $9.00 $8.50 $8.00 $7.50 $7.00 $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 2016 to February Topic 5. Projected Returns to On-Farm and Off-Farm Storage for Corn and Soybeans The projected returns over storage, shrink and opportunity costs for on-farm and off-farm storage for corn and soybeans are shown in Tables 6 9 to help guide the timing of marketing grain in storage. Historical basis for locations in Western Kentucky from 2001 to 2015 are used with current futures market quotes to develop price expectations for each month from November 2016 to July The basis information is provided by the Kentucky Farm Bureau Federation. The storage returns are calculated using the average monthly basis over the 15-year period. The median basis is included as it represents the basis level where 50% is above and 50% are below that value. For sensitivity analysis, the 10 th, 25 th, 75 th, and 90 th percentile basis levels and corresponding prices are used to project return to storage. The 25 th percentile basis is the basis where 25 percent of the basis values are at that level or lower. It can be thought of as a wider than expected basis. The 10 th percentile means 10% of the basis observations are at that level or lower. You can think of the 10 th percentile as an unusually wide basis. Similarly, the 75 th and 90 th percentiles represent years where the basis is narrower than the average value. Don t worry about the statistics just think of the sensitivity analysis as considering basis that strengthens more than expected (75 th and 90 th percentiles) or basis that is wider than expected (10 th and 25 th percentiles). The returns to storage include the opportunity cost of not selling corn at harvest. This cost is calculated at a 5% annual interest rate times the harvest price of $3.21/bushel. Farms highly leveraged with higher interest rates would have larger opportunity costs. Farms without any debt would have the minimum opportunity cost as their return on farm assets (ROA) or the return on another competitive investment. For this example, the opportunity cost is $0.0134/bushel per month for both storage methods. The on-farm storage assumes a 1% shrink and 0.1% shrink per month stored. The off-farm storage assumes shrink of 1.4%. The on-farm storage costs of moving grain in/out of storage and keeping in condition is $0.10/bushel. The off-farm storage fee is $0.40 until January 31 with a $0.04/month fee charged after January 31. The projected returns to on-farm storage for corn are shown in Table 6. Remember that the returns in Table 6 that have the most certainty are the returns for the cash-forward-contract price (CFC) assumptions as those prices 7

8 can be guaranteed with certainty by a contract. The rest of the returns in Table 6 are subject to futures market and basis volatility. Table 6. Projected Returns to On-Farm Storage for Corn from October 2016 to July / Nov Dec Jan Feb Mar Apr May Jun July Expected Basis +$ $ $ $ $ $ $ $ $0.460 Median Basis +$ $ $ $ $ $ $ $ $0.362 CFC (DTN) +$ $ $ $ $ th Percentile Basis +$ $ $ $ $ $ $ $ $ th Percentile Basis +$ $ $ $ $ $ $ $ $ th Percentile Basis +$ $ $ $ $ $ $ $ $ th Percentile Basis +$ $ $ $ $ $ $ $ $ / Cash market data for Western Kentucky locations are used to calculate daily basis for the nearby futures contract from 2001 to The monthly average basis are used with current futures prices to forecast cash market prices for November 2016 to July The expected basis is the average each month for the 15 years. The median basis is the 50th percentile or the middle of the distribution of the monthly average basis. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. The 10th, 25th, 75th and 90th percentiles are the basis level where 10%, 25%, 75% and 90% of the basis are at or below those levels, respectively. The 10th percentile basis represents a very wide basis while the 90th percentile represents a very narrow basis level. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market risk and basis volatility. Using the CFC as a price forecasting tool, the potential for positive returns of $0.256/bushel exists for January delivery. The CFC prices currently do not project returns if stored after March as quotes that far into the future are not listed. Using the median basis projections, storing corn until May could provide a return of $0.307/bushel. Late season price spikes have occurred which provides even larger return if storing into June if corn can be kept in good quality condition with summer heat and humidity. Currently there is a $0.22/bushel carry in the futures market from the December to the July corn futures contracts. In addition, the median monthly basis appreciation has averaged $0.045 from November to May over the last fifteen years. If the carry continues, farmers can feel comfortable with storing corn on-farm into the New Year. The size of the South American corn and soybean crop can reduce the carry in the market and change these projected returns. Managers need to evaluate their own costs and consider how to use price risk tools, like hedging or hedge-to-arrive contracts, to lock in a profitable storage return that meets their marketing and cash flow objectives (Table 6). Table 7 shows the projected returns to off-farm storage for corn from October 2016 to July The returns to off-farm storage are lower than on-farm storage due to the higher storage fee off-farm and a slightly larger shrink factor. An unusually strong basis is needed to provide positive returns given the current carry in the futures market. Currently, storing until May has the potential to provide a positive return to storage. Given the expense of off-farm storage, managers need to pencil out the potential return from the market for storing grain an additional month to guide sales. Table 7. Projected Returns to Off-Farm Storage for Corn from October 2016 to July / Nov Dec Jan Feb Mar Apr May Jun July Expected Basis -$ $ $ $ $ $ $ $ $0.176 Median Basis -$ $ $ $ $ $ $ $ $0.078 CFC (DTN) -$ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ / Cash market data for Western Kentucky locations are used to calculate daily basis for the nearby futures contract from 2001 to The monthly average basis are used with current futures prices to forecast cash market prices for November 2016 to July The expected basis is the average each month for the 15 years. The median basis is the 50th percentile or the middle of the distribution of the monthly average basis. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. The 10th, 25th, 75th and 90th percentiles are the basis level where 10%, 25%, 75% and 90% of the basis are at or below those levels, respectively. The 10th percentile basis represents a very wide basis while the 90th percentile represents a very narrow basis level. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market risk and basis volatility. 8

9 The projected returns to on-farm storage for soybeans are shown in Table 8. Both the on-farm and off-farm soybean storage costs include a 5% opportunity cost as soybeans could have been sold at $9.42/bushel. The shrink cost is 0.25% and 0.5%, respectively, for on-farm and off-farm storage. The cost of moving soybeans in/out of storage and keeping in condition is $0.10/bushel. The commercial storage cost is $0.30/bushel until January 31. Then the monthly fee is an additional $0.04/bushel/month. Table 8. Projected Returns to On-Farm Storage for Soybeans from October 2016 to July / Nov Dec Jan Feb Mar Apr May Jun July Expected Basis -$ $ $ $ $ $ $ $ $0.326 Median Basis -$ $ $ $ $ $ $ $ $0.129 CFC (DTN) +$ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis +$ $ $ $ $ $ $ $ $ th Percentile Basis +$ $ $ $ $ $ $ $ $ / Cash market data for Western Kentucky locations are used to calculate daily basis for the nearby futures contract from 2001 to The monthly average basis are used with current futures prices to forecast cash market prices for November 2016 to July The expected basis is the average each month for the 15 years. The median basis is the 50th percentile or the middle of the distribution of the monthly average basis. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. The 10th, 25th, 75th and 90th percentiles are the basis level where 10%, 25%, 75% and 90% of the basis are at or below those levels, respectively. The 10th percentile basis represents a very wide basis while the 90th percentile represents a very narrow basis level. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market risk and basis volatility. Currently, there is a potential $0.10/bushel return storing on-farm until January assuming the median historical basis. The average historical basis projects a slightly lower return of $0.088/bushel for January delivery from on-farm storage. Notice that returns are lower in February and March which corresponds with expectations of South America s soybean crops capping price potential for the US crop. The stronger than expected exports will likely switch back to more competitively priced South American origins in February or March. Soybeans have historically rallied in July which offers the largest projected return but comes with the risk of passing up profitable selling opportunities earlier in the Spring (Table 8). The projected returns to off-farm soybean storage are shown in Table 9. The greater fees associated with offfarm storage makes it difficult to pencil out a positive return to storage for commercial soybean storage. The current projections suggest managers need nerves of steel to use commercial storage until July and hope that the average basis is obtained for a potential $0.102/bushel return. Alternatively, managers need a much stronger than expected basis to pencil out a positive return to storage but would still have to wait until July for the positive returns (Table 9). Table 9. Projected Returns to Off-Farm Storage for Soybeans from October 2016 to July / Nov Dec Jan Feb Mar Apr May Jun July Expected Basis -$ $ $ $ $ $ $ $ $0.102 Median Basis -$ $ $ $ $ $ $ $ $0.095 CFC (DTN) -$ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ th Percentile Basis -$ $ $ $ $ $ $ $ $ / Cash market data for Western Kentucky locations are used to calculate daily basis for the nearby futures contract from 2001 to The monthly average basis are used with current futures prices to forecast cash market prices for November 2016 to July The expected basis is the average each month for the 15 years. The median basis is the 50th percentile or the middle of the distribution of the monthly average basis. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. The 10th, 25th, 75th and 90th percentiles are the basis level where 10%, 25%, 75% and 90% of the basis are at or below those levels, respectively. The 10th percentile basis represents a very wide basis while the 90th percentile represents a very narrow basis level. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market risk and basis volatility. 9

10 I recognize there is little interest in thinking about pulling grain out of storage at this time; especially as harvest is not fully completed across Kentucky. These tables are to remind managers that this is an important time to add value to the crop through storage and to consider sales based on the best return instead of sales dictated solely by cash flow demands. The above examples also reinforce the need for managers to know their storage costs to be able to determine the projected return from an additional month of storage expense. Use the market signals and cost information to guide your marketing decisions. Topic 6. 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 10