Crops Marketing and Management Update Department of Agricultural Economics Princeton REC Dr. Todd D. Davis Assistant Extension Professor -- Crop Economics Marketing & Management Vol. 2016 (3) March 9, 2016 Topics in this Month s Update: 1. March 9 th WASDE Update: USDA Makes Minor Adjustments 2. 2016 RP Projected Prices Lower: What is the Safety-Net for Corn and Soybeans? 3. Price Risk Management Alternatives for 2016 Wheat 4. Price Risk Management Alternatives for 2016 Corn and Soybeans 5. Corn and Soybean Storage Risk Management Alternatives for May Delivery 6. Projected Returns to On-Farm and Off-Farm Storage for Corn and Soybeans 7. USDA Updates 2016-25 Baseline Projections for Corn, Soybeans and Wheat 8. How Do I Get on the Email Distribution List to Receive this Newsletter? Topic 1. March 9 th WASDE Update: USDA Makes Minor Adjustments The March WASDE is usually quickly forgotten as the market places greater focus on the Prospective Plantings report, released March 31, that will provide an initial estimate of potential planted acreage. In light of sluggish demand and no production changes, the March report was not expected to provide much news. Table 1. U.S. Corn Supply and Use 2012-13 2013-14 2014-15 2015-16 Change from Estimated Projected Projected 14-15 Planted Area (million) 97.3 95.4 90.6 88.0-2.6 Harvested Area (million) 87.4 87.5 83.1 80.7-2.4 Yield (bushels/acre) 123.1 158.1 171.0 168.4-2.6 ------------------- Million Bushels ------------------- Beginning Stocks 989 821 1,232 1,731 +499.0 Production 10,755 13,829 14,216 13,601-615.0 Imports 160 36 32 50 +18.0 Total Supply 11,904 14,686 15,479 15,382-97.0 Feed and Residual 4,315 5,036 5,315 5,300-15.0 Food, Seed & Industrial 6,038 6,501 6,568 6,595 +27.0 Ethanol and by-products 4,641 5,134 5,209 5,225 +16.0 Exports 730 1,917 1,864 1,650-214.0 Total Use 11,083 13,454 13,748 13,545-203.0 Ending Stocks 821 1,232 1,731 1,837 +106 Stocks/Use 7.4% 9.2% 12.6% 13.6% +1.0% Days of Stocks 27 33 46 50 +4 U.S. Marketing-Year Average Price ($/bu) $6.89 $4.46 $3.70 $3.60 $0.10 Source: March 2016 WASDE - USDA: WAOB. The report did not make any changes to either the supply or the use projections for corn. The corn market continues to struggle with use that is projected 203 million bushels less than the previous marketing-year. Exports have been plagued by a strong US Dollar coupled with price competitive exports from Brazil. Ending stocks are projected to increase by 106 million bushels over the previous year to 1.837 billion bushels. This is a 13.6% stocks-use ratio or about a 50-day supply of corn available prior to the 2016 corn harvest. The U.S. marketing-year average (MYA) price is projected to be $0.10/bushel lower to $3.60/bushel. The market was expecting stocks to increase slightly to 1.86 billion bushels so the March report was neutral. 1
The March report reduced global corn stocks to 206.97 million metric ton (MMT). The report did not adjust production estimates for Argentina and Brazil where the projected corn crop is pegged at 27 MMT and 84 MMT, respectively. Table 2. U.S. Soybean Supply and Use 2012-13 2013-14 2014-15 2015-16 Change from Estimated Projected Projected 14-15 Planted Area (million) 77.2 76.8 83.3 82.7-0.6 Harvested Area (million) 76.1 76.3 82.6 81.8-0.8 Yield (bushels/acre) 40 44 47.5 48.0 +0.5 ------------------- Million Bushels ------------------- Beginning Stocks 169 141 92 191 +99.0 Production 3,042 3,358 3,927 3,929 +2.0 Imports 41 72 33 30-3.0 Total Supply 3,252 3,570 4,052 4,150 +98.0 Crushings 1,689 1,734 1,873 1,870-3.0 Exports 1,317 1,647 1,843 1,690-153.0 Seed 89 97 96 96 +0.0 Residual 16 0 49 34-15.0 Total Use 3,111 3,478 3,862 3,690-172.0 Ending Stocks 141 92 191 460 +269.0 Stocks/Use 4.5% 2.6% 4.9% 12.5% +7.5% Days of Stocks 17 10 18 46 +27.4 U.S. Marketing-Year Average Price ($/bu) $14.40 $13.00 $10.10 $8.75 -$1.35 Source: March 2016 WASDE - USDA: WAOB. Table 3. U.S. Wheat Supply and Use 2012-13 2013-14 2014-15 2015-16 Change from Estimated Projected Projected 14-15 Planted Acres (million) 55.3 56.2 56.8 54.6-2.2 Harvested Acres (million) 48.8 45.3 46.4 47.1 +0.7 Yield (bushels/acre) 46.2 47.1 43.7 43.6-0.1 ------------------- Million Bushels ------------------- Beginning Stocks 743 718 590 752 +162.0 Production 2,252 2,135 2,026 2,052 +26.0 Imports 123 169 149 120-29.0 Total Supply 3,118 3,021 2,766 2,924 +158.0 Food 945 952 958 967 +9.0 Seed 73 77 81 66-15.0 Feed and Residual 370 226 120 150 +30.0 Exports 1,012 1,176 854 775-79.0 Total Use 2,400 2,431 2,014 1,958-56.0 Ending Stocks 718 590 752 966 +214.0 Stocks/Use 29.9% 24.3% 37.3% 49.3% +12.0% Days of Stocks 109 89 136 180 +44 U.S. Marketing-Year Average Price ($/bu) $7.77 $6.87 $5.99 $5.00 -$0.99 Source: March 2016 WASDE - USDA: WAOB. The March report reduced projected crushing use by 10 million bushels to 1.87 billion bushels as a response to projected lower soybean meal exports. This increased ending stocks to 460 million bushels up 269 million bushels over the previous year. The stocks-use ratio is projected to increase to 12.5% which is about a 46 day supply of soybeans on hand at the start of the 2016-17 marketing-year. The US MYA farm price is projected at $8.75/bushel down $1.35/bushel from the previous year. The report decreased global soybean stocks to 78.87 MMT due to lowered stocks in Argentina and Brazil. Production estimates in Argentina and Brazil was unchanged at 58.5 MMT and 100 MMT, respectively. The March report did not adjust the supply or demand projections for wheat. Wheat s demand is projected to decline 56 million bushels from last year. Projected exports at 775 million bushels, if realized, will be the lowest level of exports since the 1971-72 marketing-year. Projected ending stocks at 966 million bushels are a stocks-use ratio of 49.3% or about a 180 day supply of wheat available at the start of the 2016-17 marketing-year. The 2015-16 US MYA price is projected at $5 per bushel which is $0.99/bushel lower than the previous year. The report trimmed global wheat stocks to a 237.59 MMT which is still a record large level of wheat stocks. Besides having abundant stocks domestically, world stocks of corn, soybeans and wheat are projected to increase by 1.9, 1.73 and 22.9 Million Metric Tons (MMT), respectively from 2014-15. USDA projects that China s corn stocks will increase by 11 MMT and that China holds about 54% of the world s projected 2015-16 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. For soybeans, Argentina and Brazil are projected to have 36% and 23% 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. 2
Topic 2. 2016 RP Projected Prices Lower: What is the Safety-Net for Corn and Soybeans? The projected price for corn and soybeans are based on the December and November futures contracts closing prices, respectively, throughout February. The 2016 projected price for corn and soybeans are $3.86 and $8.85, respectively. The 2016 projected price for corn is $0.76/bushel lower than the average RP projected price from 2006 20015. Similarly, the 2016 soybean projected price is $1.72/bushel lower than the average RP projected price from the previous ten years. Figure 1 shows the revenue guarantee provided for a corn farm with an APH yield of 150 bushels per acre with RP insurance coverage levels ranging from 70% to 85%. The projected prices for RP insurance for corn in 2013, 2014, 2015 and 2016 were $5.65, $4.62, $4.15 and $3.86 per bushel, respectively. Figure 1 also has the 2016 per acre variable cost for corn of $399 (red line) and the per acre variable cost plus cash rent of $599 (black line) based on UK crop enterprise budgets for Western Kentucky. $5.65 $4.62 $4.15 $3.86 TVC TVC+Rent At the 80% coverage level, RP corn $750 insurance revenue guarantee has $725 $700 declined from $678/acre in 2013 to $675 $463/acre in 2016 assuming an $650 $625 APH yield of 150 bushels/acre. The $600 revenue guarantee in 2013 was $575 $550 enough to insure a return over $525 input costs plus cash rent. The $500 $475 revenue guarantee declined $450 $124/acre from 2013 to 2014 and $425 $400 an additional $56/acre from 2014 $375 to 2015. The 2016 revenue $350 $325 guarantee is $35/acre lower than $300 last year s guarantee based on the 70% 75% 80% 85% RP Insurance Coverage Level (%) projected price (Figure 1). Figure 1. Revenue Guarantee for Corn with a 150 bushel APH Yield at 70% to 85% Coverage Levels at the 2013 to 2016 Projected Prices. $/Acre At the 75% coverage level, the corn revenue guarantee was $636/acre in 2013 but is $434/acre in 2016. The 2016 corn revenue guarantee at the 75% coverage level is $33/acre lower than last year s guarantee based on the projected price (Figure 1). Figure 2 shows the revenue guarantee provided for a soybean farm with an APH yield of 50 bushels per acre with RP insurance coverage levels ranging from 70% to 85%. The projected prices for RP insurance for soybeans in 2013, 2014, 2015 and 2016 were $12.87, $11.36, $9.73 and $8.85 per bushel, respectively. Figure 2 also has the 2016 per acre variable cost for corn of $241 (red line) and the per acre variable cost plus cash rent of $441 (black line) based on UK crop enterprise budgets for Western Kentucky. 3
$/Acre $575 $550 $525 $500 $475 $450 $425 $400 $375 $350 $325 $300 $275 $250 $225 $200 $175 $12.87 $11.36 $9.73 $8.85 TVC TVC+Rent At the 75% coverage level, RP soybean insurance revenue guarantee has declined from $483/acre in 2013 to $332/acre in 2016 assuming an APH yield of 50 bushels/acre. The revenue guarantee in 2013 was enough to insure a return over input costs plus cash rent. The revenue guarantee declined $57/acre from 2013 to 2014 and $61/acre from 2014 to 2015. The 2016 revenue guarantee is $31/acre lower than last year s guarantee based on projected price $150 70% 75% 80% 85% RP Insurance Coverage Level (%) Figure 2. Revenue Guarantee for Soybeans with a 50 bushel APH Yield at 70% to 85% Coverage Levels at the 2013 to 2016 Projected Prices. At 70% coverage, the soybean revenue guarantee has decreased $141/acre from 2013 to 2016 (Figure 2). Figure 3 compares the 2015 projected revenue guarantee provided for corn and soybeans less each crop s total variable costs plus cash rent expense at the 70 to 85 percent coverage levels. Because soybeans have lower production costs, RP insurance for soybean may provide a safety-net with a smaller per acre loss than that for corn. At the 85% coverage level, RP insurance for soybeans doesn t cover $36 of the total variable costs plus cash rent (Figure 3). In contrast, RP insurance for corn doesn t cover $85 of the total variable costs plus cash rent at the same coverage level (Figure 3). $/Acre $0 -$50 -$100 -$150 -$200 $3.86 $8.85 70% 75% 80% 85% -$65 -$87 -$109 -$107 -$131 -$136 -$165 -$194 Figure 3 shows the per acre deficit between the RP insurance revenue guarantee and the per acre input cost plus cash rent expense for corn and soybeans. Because per acre production costs are budgeted at $158/acre less than corn, RP soybean insurance guarantees a smaller loss for soybeans than corn. For corn, RP insurance at the 70% level does not cover $194/acre of input and rent expense. The deficit at the 80% coverage level is $136/acre. -$250 RP Insurance Coverage Level (%) Figure 3. 2016 Revenue Guarantees for Corn (Blue) and Soybeans (Red) less their Respective Total Variable Costs plus Cash Rent Expense. For soybeans, RP insurance at the 70% level doesn t cover $131 of total input and cash rent. This deficit is $87/acre at the 80% coverage level. Based on conversations with farmers across the state during winter Extension meetings, most are planning on maintaining their crop rotation as there is little market incentive to make large acreage shifts to a particular crop. 4
Some have mentioned that financing limitations may force more soybean acres than corn this year due to lower input costs. The better risk protection provided by RP insurance for soybeans may reinforce this decision for those facing credit constraints. Farmers will need to use all of the risk-management tools available to protect revenue in 2016. RP insurance is one tool that will enable forward contracting some production without the risk of a crop loss limiting fulfillment of the contract. Insurance, contracting, hedging, put options and other price risk management tools should be considered this year in a comprehensive risk management plan. Farmers have until March 15, 2016, to make their crop insurance decisions. Topic 3. Price Risk Management Alternatives for 2016 Wheat Table 4 provides a snapshot of cash-forward contract (CFC) bids for June delivery for select locations in Western Kentucky as reported by DTN. Table 4. Cash Wheat Bids for June Delivery - Select Markets in Kentucky Feb Feb Feb Feb Feb Feb Feb Mar Mar Mar 15 17 19 22 24 26 29 2 4 7 Livermore (Perdue) $4.43 $4.63 $4.63 $4.57 $4.45 $4.48 $4.47 $4.42 $4.52 $4.54 Eddyville $4.79 $4.72 $4.60 $4.59 $4.60 $4.56 $4.67 $4.69 Henderson $4.78 $4.75 $4.72 $4.60 $4.60 $4.60 $4.57 $4.67 $4.69 Mayfield $4.55 $4.57 Hopkinsville (Elevator) $4.38 $4.45 $4.42 $4.30 $4.30 $4.31 $4.32 $4.41 $4.42 Hopkinsville (Siemer Milling) $4.67 $4.78 $4.74 $4.72 $4.59 $4.59 $4.55 $4.67 $4.69 Average $4.49 $4.73 $4.67 $4.63 $4.51 $4.49 $4.51 $4.48 $4.58 $4.60 Source: DTN Cash Bids for Select Dates Listed Above. Average cash wheat prices for June delivery reached $4.73 on February 17 but have gradually been transitioning lower to an average of $4.60 on March 7. As always, managers should know their costs and monitor the market for risk management opportunities prior to harvest. Cash Price ($/Bushel) $6.50 $6.25 $6.00 $5.75 $5.50 $5.25 $5.00 $4.75 $4.50 $4.25 $4.00 $3.75 $3.50 $3.25 $3.00 $2.75 $2.50 Cash CFC Put TVC + Rent TVC $4.25 $4.50 $4.75 $5.00 $5.25 $5.50 $5.75 $6.00 Futures Price ($/Bushel) Figure 4. Comparison of Price Risk Management Strategies for 2016 Wheat. Figure 4 illustrates the ability of a cash-forward contract (CFC) at $4.60, a put with a $4.70 strike price that costs $0.25/bushel and cash sales at harvest to cover total variable cash costs excluding rent (red dash line at $3.54/bushel) and the total variable cash costs plus cash rent (black dash line at $6.21/bushel) targets. The 2016 wheat crop is going to provide a challenge for those who planted wheat on rented land as a price of $6.21/bushel is needed to break-even over total cash variable costs plus cash rent. Farmers who planted wheat on owned land and who are only worried about covering cash variable costs may be able to use CFC or put options to protect revenue and meet cash cost obligations. Managers need to monitor pricing opportunities to protect their downside risk as best as possible. Topic 4. Price Risk Management Alternatives for 2016 Corn and Soybeans Sometimes the best pricing opportunities present themselves prior to planting or right at planting. Table 5 lists CFC corn bids for October delivery for selected markets in Western Kentucky. The average bids have been consistently between $3.68 and $3.83 for about the last month (Table 5). 5
Table 5. Cash Corn Bids for October Delivery - Select Markets in Kentucky Feb Feb Feb Feb Feb Feb Feb Feb Feb Mar Mar Mar 10 12 15 17 19 22 24 26 29 2 4 7 Livermore (Perdue) $3.59 $3.57 $3.57 $3.65 $3.65 $3.66 $3.62 $3.55 $3.53 $3.52 $3.55 $3.55 Sebree (Tyson) $3.88 $3.86 $3.86 $3.94 $3.91 $3.95 $3.88 $3.83 $3.85 $3.80 $3.82 $3.84 Pembroke $4.18 $4.17 $4.17 $4.24 $4.21 $4.25 $4.19 $4.13 $4.11 $4.09 $4.13 $4.14 Eddyville $3.58 $3.61 $3.61 $3.63 $3.56 $3.50 $3.47 $3.47 $3.48 $3.50 Henderson $3.60 $3.59 $3.59 $3.66 $3.64 $3.68 $3.61 $3.55 $3.53 $3.52 $3.53 $3.54 Owensboro $3.58 $3.57 $3.57 $3.64 $3.62 $3.65 $3.59 $3.53 $3.51 $3.50 $3.53 $3.54 Mayfield $3.94 $3.91 $3.91 $3.99 $3.96 $4.00 $3.93 $3.88 $3.85 $3.84 $3.88 $3.89 Average $3.76 $3.78 $3.78 $3.82 $3.80 $3.83 $3.77 $3.71 $3.69 $3.68 $3.70 $3.71 The average CFC bid for corn for October delivery reached $3.83/bushel on February 22 due to strong bids from processors/feed mills. Since then, the average bid has been lower with a range of $3.68 to $3.71 for the first few days in March. Source: DTN Cash Bids for Select Dates Listed Above. Cash Price ($/Bushel) $6.00 $5.75 $5.50 $5.25 $5.00 $4.75 $4.50 $4.25 $4.00 $3.75 $3.50 $3.25 $3.00 $2.75 $2.50 Cash CFC Put TVC + Rent A Cash Forward Contract at $3.71 is $0.11 below the per bushel total variable cash costs plus cash rent (black line at $3.82). A just-in-the money put with a $3.80 strike price costs $0.29. Assuming a -$0.10 harvest basis, an expected price floor can be establisehd at $3.41 which is a -$0.41 per bushel loss. When DEC corn futures is above $4.10, the value of the put is greater than the CFC. The "Do-Nothing" strategy (red line) shows that at current price levels, risk management is used to limit loss. $3.00 $3.20 $3.40 $3.60 $3.80 $4.00 $4.20 $4.40 $4.60 Futures Price ($/Bushel) Figure 5. Comparison of Price Risk Management Strategies for 2016 Corn. Table 6. Cash Soybean Bids for October Delivery - Select Markets in Kentucky Feb Feb Feb Feb Feb Feb Feb Mar Mar Mar 15 17 19 22 24 26 29 2 4 7 Livermore (Perdue) $8.66 $8.73 $8.73 $8.72 $8.65 $8.59 $8.56 $8.56 $8.73 $8.73 Eddyville $8.76 $8.76 $8.77 $8.68 $8.61 $8.58 $8.60 $8.76 $8.78 Henderson $8.74 $8.79 $8.77 $8.80 $8.71 $8.64 $8.56 $8.57 $8.73 $8.75 Owensboro $8.76 $8.81 $8.79 $8.81 $8.73 $8.66 $8.63 $8.65 $8.81 $8.83 Hopkinsville (Elevator) $8.51 $8.49 $8.51 $8.42 $8.37 $8.34 $8.35 $8.50 $8.51 Average $8.67 $8.77 $8.71 $8.72 $8.64 $8.57 $8.53 $8.55 $8.71 $8.72 Figure 5 compares the effectiveness of a CFC at $3.71/bushel, a $3.80 Put that costs $0.29, and doing nothing in managing price risk for the 2016 corn crop. Assuming a per bushel total variable cash cost plus cash rent of $3.82/bushel, the CFC would lock in a loss of $0.11/bushel below the cash production costs and rent. Similarly, the $3.80 put would establish a price floor at $3.41/bushel which is a loss of $0.41/bushel. At this time, risk management could be used to limit losses but are not at a level to protect profits. The average CFC bid for soybeans for October delivery reached a recent low of $8.53 on February 29 but has rallied to an average of $8.72 on March 7. In general, the average bids have been in the $8.65 to $8.75 range for about the last month. Source: DTN Cash Bids for Select Dates Listed Above. Cash Price ($/Bushel) $11.50 $11.00 $10.50 $10.00 $9.50 $9.00 $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 Cash CFC Put TVC + Rent A Cash Forward Contract at $8.72 would fully cover per bushel total cash variable costs plus cash rent (the black line at $8.50) and lock in a $0.22/bushel return. A just-in-the-money put with a $9.00 strike price costs $0.49. Assuming a -$0.10 harvest basis, an expected price floor can be establisehd at $8.41 which is a $0.09/bushel loss over total cash variable costs plus cash rent. When Nov soybean futures are above $9.31, the value of the put is greater than the CFC. The "Do-Nothing" strategy (red line) shows that limited risk management opportunities are available to protect some revenue. Farmers should calculate price needed to cover production costs, rent, debt payments and family living which will be more than $8.50/bushel. $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 $11.00 Futures Price ($/Bushel) Figure 6. Comparison of Price Risk Management Strategies for 2016 Soybeans. Figure 6 compares the effectiveness of a CFC at $8.72/bushel, a $9.00 Put that costs $0.49, and doing nothing in managing price risk for the 2016 soybean crop. Assuming a per bushel total variable cash cost plus cash rent of $8.50/bushel, the CFC would lock in a profit of $0.22/bushel above cash production costs and rent. The $9.00 put would establish a price floor at $8.41/bushel which is a loss of $0.09/bushel. Managers need to know their per bushel costs to protect profits whenever they present themselves. Topic 5. Corn and Soybean Storage Risk Management Alternatives for May Delivery Let s look at the risk management alternatives available if corn and soybeans are stored into May. The black dashed line in Figure 7 is the per bushel total variable cash cost + cash rent + on-farm storage cost from October to 6
May assuming a harvested yield of 175 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 $3.54/bushel a minimum price needed to cover the cash costs of farming and storing grain. Cash-forward contracts for May delivery are listed on DTN at an average of $3.67/bushel which would be a $0.13/bushel return over total cash variable costs, rent and storage. Similarly, a hedge with May futures would lock in a price at $3.67 and a return of $0.13/bushel over the pricing objective. A just-out-of-the-money put option with a $3.65 strike price would place a floor $0.06/bushel above the objective. A benefit of a put is that it provides flexibility to benefit from higher prices if May futures rally between now and the expiration on April 22, 2016 (Figure 2). Cash CFC Futures Put TVC+Rent+Storage $5.25 $5.00 $4.75 $4.50 $4.25 A May cash-forward-contract (red line) at $3.67 would provide a $0.13/bushel return over total cash variable costs, rent and storage (black line at $3.54/bushel). Hedging with a May Futures contract (green line) at $3.61 will lock in a cash price of $3.67/bushel at an expected basis of +$0.06/bushel. This hedge would lock in a return of $0.13/bushel A just-out-of-the-money put (orange line) at a $3.65 strike price costs $0.11 and will lock in a floor at $3.60/bushel and a $0.06/bushel return. When May Futures are at $3.72, the put is better than the hedge and the CFC. The May put expires on April 22, 2016, so risk coverage ends on that date. 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 7. Comparison of Price Risk Management Alternatives for Storing Corn from October 2015 to May 2016. Price risk management alternatives for soybeans are illustrated in Figure 8. The pricing objective of $8.43/bushel will cover the per bushel cash total variable production costs, cash rent and on-farm storage from October to May based on the state average yield of 52 bushels/acre. The average CFC for May 2016 is $8.77/bushel which would be a $0.34/bushel return (red line). Similarly, hedging with May soybean futures (green line) would lock in a price at $8.90 assuming a basis of +$0.05/bushel which would be a $0.47 return over the pricing objective. An inthe money put with an $8.90 strike price costs $0.19/bushel and would provide a floor that is $0.33 above the pricing objective. When May futures are at $8.99/bushel or higher, the put option is better than the hedge. Similarly, when May futures at $8.91/bushel or higher, a put is better than the CFC. Remember that the put option will expire on April 22, 2016 which will end your price protection. $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 $6.50 $6.00 $5.50 $5.00 A May cash-forward-contract (red line) at $8.77 would provide a $0.34/bushel return over total cash variable costs, rent and storage (black line at $8.43/bushel). Hedging with a May Futures contract (green line) at $8.85 will lock in a cash price of $8.90/bushel at an expected basis of +$0.05/bushel. This hedge would lock in a return of $0.47/bushel An in-the money put at a $8.90 strike price (orange line) costs $0.19 and will lock in a floor at $8.76 with a profit of $0.33/bushel. However, when May Futures are at $8.99, the put is better than the hedge. When May Futures are at $8.91, the put is better than the CFC. The May put expires on April 22, 2016 which will end the price protection. $6.50 $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 Futures Price Figure 8. Comparison of Price Risk Management Alternatives for Storing Soybeans from October 2015 to May 2016 7
Topic 6. 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 7 10 to help guide the timing of marketing grain in storage. Historical basis for locations in Western Kentucky from 2001 to 2014 are used with current futures market quotes to develop price expectations for each month from November 2015 to July 2016. The basis information is provided by the Kentucky Farm Bureau Federation. To provide some sensitivity analysis, the basis is assumed to be one standard deviation higher and lower which would cover perhaps 68% of the potential basis outcomes. For even more sensitivity analysis, the basis is assumed to be two standard deviations higher or lower which might capture 95% of the potential basis variability. Don t worry about the statistics just think of the sensitivity analysis as considering basis that appreciates more than expected (+ standard deviations) or basis appreciating less than expected (- standard deviations). The projected returns to on-farm storage for corn are shown in Table 7. Remember that the returns in Table 7 that have the most certainty are the returns for the cash-forward-contract price assumptions as those prices can be guaranteed with certainty by a contract. The rest of the returns in Table 7 are subject to futures market and basis volatility. Table 7. Projected Returns to On-Farm Storage for Corn from October 2015 to July 2016 1/ Nov Dec Jan Feb Mar Apr May Jun July Expected Basis +$0.091 +$0.083 +$0.014 -$0.024 -$0.114 -$0.104 -$0.095 -$0.082 -$0.105 CFC (DTN) +$0.091 +$0.083 +$0.014 -$0.024 -$0.079 -$0.095 -$0.111 -$0.082 -$0.087 +1-std dev +$0.091 +$0.083 +$0.014 -$0.024 +$0.018 +$0.010 +$0.025 +$0.040 +$0.078 + 2 std dev +$0.091 +$0.083 +$0.014 -$0.024 +$0.151 +$0.124 +$0.144 +$0.162 +$0.262-1 std dev +$0.091 +$0.083 +$0.014 -$0.024 -$0.247 -$0.218 -$0.214 -$0.204 -$0.289-2 std dev +$0.091 +$0.083 +$0.014 -$0.024 -$0.379 -$0.332 -$0.333 -$0.326 -$0.473 1/ Expected basis is average from 2001 to 2014 for Western Kentucky locations. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. Plus 1 std. deviation is the expected basis plus 1 standard deviation which could be considered an optimistic expectation for an appreciating basis. Plus 2 standard deviations is the expected basis plus 2 standard deviations which could be considered an extremely optimistic basis appreciation. Minus 1 standard deviation is the expected basis minus 1 standard deviation which could be considered a pessimistic view of basis appreciation. Minus 2 standard deviations is the expected basis minus 2 standard deviations which could be considered an extremely pessimistic view of basis appreciation. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market and basis volatility. The returns to storage include the opportunity cost of not selling corn at harvest. This cost is calculated at a 5% annual interest rate. Farms highly leveraged with higher interest rates also have larger opportunity costs. At current futures prices and various basis assumptions, managers will need to analyze the cost of holding corn additional months as basis and carry are currently not there to reward additional storage. Basis will have to strengthen by 2 standard deviations for the market to reward storage further into the spring. Using the CFC listed on DTN, the market is not rewarding storage into April or May. Table 8. Projected Returns to Off-Farm Storage for Corn from October 2015 to July 2016 1/ Nov Dec Jan Feb Mar Apr May Jun July Expected Basis -$0.194 -$0.199 -$0.264 -$0.299 -$0.386 -$0.372 -$0.359 -$0.343 -$0.363 CFC (DTN) -$0.194 -$0.199 -$0.264 -$0.299 -$0.351 -$0.363 -$0.375 -$0.343 -$0.344 +1-std dev -$0.194 -$0.199 -$0.264 -$0.299 -$0.253 -$0.258 -$0.240 -$0.221 -$0.179 + 2 std dev -$0.194 -$0.199 -$0.264 -$0.299 -$0.121 -$0.144 -$0.120 -$0.099 +$0.005-1 std dev -$0.194 -$0.199 -$0.264 -$0.299 -$0.518 -$0.486 -$0.478 -$0.465 -$0.546-2 std dev -$0.194 -$0.199 -$0.264 -$0.299 -$0.651 -$0.600 -$0.598 -$0.587 -$0.730 1/ Expected basis is average from 2001 to 2014 for Western Kentucky locations. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. Plus 1 std. deviation is the expected basis plus 1 standard deviation which could be considered an optimistic expectation for an appreciating basis. Plus 2 standard deviations is the expected basis plus 2 standard deviations which could be considered an extremely optimistic basis appreciation. Minus 1 standard deviation is the expected basis minus 1 standard deviation which could be considered a pessimistic view of basis appreciation. Minus 2 standard deviations is the expected basis minus 2 standard deviations which could be considered an extremely pessimistic view of basis appreciation. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market and basis volatility. There is a lot more red ink for the projected returns to off-farm storage. The higher storage costs plus opportunity cost makes it difficult to pencil out a positive return to storage. Extreme basis appreciated is needed to cover all storage costs. Table 8 shows the projected returns to off-farm storage for corn from October 2015 to July 2016. 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. Even an unusually strong basis will not provide positive returns given the current lack of carry in the market. Given that off-farm storage is more expensive than on-farm storage, managers need to pencil out the potential 8
return from the market for storing grain an additional month to guide sales. The projected margins, using current futures market prices, will require significant basis appreciation for positive returns to off-farm storage The projected returns to on-farm storage for soybeans are shown in Table 9. The soybean futures market also has limited carry like the corn market. Projected returns to on-farm storage until March 2016 is a loss of $0.31/bushel assuming the CFC prices (Table 9). If basis strengthens to +1 std. dev., then a potential return to onfarm storage in March could be $0.179/bushel. Table 9. Projected Returns to On-Farm Storage for Soybeans from October 2015 to July 2016 1/ Nov Dec Jan Feb Mar Apr May Jun July Expected Basis -$0.164 -$0.058 -$0.107 -$0.264 -$0.110 -$0.297 -$0.193 -$0.188 -$0.106 CFC (DTN) -$0.164 -$0.058 -$0.107 -$0.264 -$0.308 -$0.208 -$0.208 -$0.208 -$0.241 +1-std dev -$0.164 -$0.058 -$0.107 -$0.264 +$0.179 +$0.077 -$0.084 -$0.088 +$0.256 + 2 std dev -$0.164 -$0.058 -$0.107 -$0.264 +$0.469 +$0.451 +$0.025 +$0.012 +$0.618-1 std dev -$0.164 -$0.058 -$0.107 -$0.264 -$0.400 -$0.671 -$0.303 -$0.287 -$0.468-2 std dev -$0.164 -$0.058 -$0.107 -$0.264 -$0.689 -$1.045 -$0.412 -$0.387 -$0.831 1/ Expected basis is average from 2001 to 2014 for Western Kentucky locations. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. Plus 1 std. deviation is the expected basis plus 1 standard deviation which could be considered an optimistic expectation for an appreciating basis. Plus 2 standard deviations is the expected basis plus 2 standard deviations which could be considered an extremely optimistic basis appreciation. Minus 1 standard deviation is the expected basis minus 1 standard deviation which could be considered a pessimistic view of basis appreciation. Minus 2 standard deviations is the expected basis minus 2 standard deviations which could be considered an extremely pessimistic view of basis appreciation. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market and basis volatility. Table 10. Projected Returns to Off-Farm Storage for Soybeans from October 2015 to July 2016 1/ Nov Dec Jan Feb Mar Apr May Jun July Expected Basis -$0.311 -$0.205 -$0.254 -$0.411 -$0.257 -$0.444 -$0.340 -$0.335 -$0.253 CFC (DTN) -$0.311 -$0.205 -$0.254 -$0.411 -$0.455 -$0.355 -$0.355 -$0.355 -$0.388 +1-std dev -$0.311 -$0.205 -$0.254 -$0.411 +$0.032 -$0.070 -$0.231 -$0.235 +$0.109 + 2 std dev -$0.311 -$0.205 -$0.254 -$0.411 +$0.322 +$0.304 -$0.122 -$0.135 +$0.471-1 std dev -$0.311 -$0.205 -$0.254 -$0.411 -$0.547 -$0.818 -$0.450 -$0.434 -$0.615-2 std dev -$0.311 -$0.205 -$0.254 -$0.411 -$0.836 -$1.192 -$0.559 -$0.534 -$0.978 1/ Expected basis is average from 2001 to 2014 for Western Kentucky locations. CFC (DTN) is cash-forward-contract prices as reported on DTN for Western Kentucky locations. Plus 1 std. deviation is the expected basis plus 1 standard deviation which could be considered an optimistic expectation for an appreciating basis. Plus 2 standard deviations is the expected basis plus 2 standard deviations which could be considered an extremely optimistic basis appreciation. Minus 1 standard deviation is the expected basis minus 1 standard deviation which could be considered a pessimistic view of basis appreciation. Minus 2 standard deviations is the expected basis minus 2 standard deviations which could be considered an extremely pessimistic view of basis appreciation. The only forecast which is certain is the CFC (DTN) as those are contracted prices. The rest are subject to market and basis volatility. If basis appreciates more than expected (+1 std. dev.), then the projected return to storage to March is a profit of $0.179/bushel. Basis will need to appreciate by 2 std. dev. for a chance of larger positive storage returns. If basis appreciates more than expected (+2 std. dev.), the projected return to storage to March is $0.242/bushel. However, DTN CFC bids suggest that returns to off-farm storage will be negative for most basis expectations. The projected returns to off-farm soybean storage are shown in Table 10. The greater fees associated with off-farm storage and lack of significant carry in the soybean futures market makes it difficult to pencil out a positive return to storage unless there is much stronger basis appreciation than expected. If basis appreciates more than expected (+2 std. dev.) then storing soybeans until April 2016 gives a projected return to storage of $0.304/bushel. If basis is average or even with CFC to fix price, the projected returns to off-farm soybean storage are negative. Topic 7. USDA Updates 2016-25 Baseline Projections for Corn, Soybeans and Wheat USDA revised their Agricultural Baseline Projections for 2016 to 2025 during the 2016 USDA Agricultural Outlook conference in late February. The preliminary projections were released in December 2015 and were discussed in the December newsletter. The February 2016 update provides some insight into USDA s thinking about the feed grains and oilseeds markets and price potential for the 2016-17 marketing-year. Remember that all of these projections are based on an economic model and farmers were not surveyed regarding their 2016 planned acreage. These assumptions also assume trend-yields which mean that there will be no weather shock to boost or curb production. 9
Table 11. 2016 Baseline Projection for Corn Updated February 2016.A54 2014-15 2015-16 2016/17 Change from Estimated Projected Projected 2015-16 Planted Acres (million) 90.6 88.0 90.0 +2.0 Harvested Acres (million) 83.1 80.7 82.3 +1.6 Yield ( bushels/acre) 171.0 168.4 168.0-0.4 --------------- Million Bushels--------------- Beginning stocks 1,232 1,731 1,837 +106.0 Production 14,216 13,601 13,825 +224.0 Imports 32 50 40-10.0 Supply 15,479 15,382 15,702 +320.0 Feed & residual 5,315 5,300 5,425 +125.0 Food, seed, & industrial 6,568 6,595 6,600 +5.0 Ethanol and by-products 5,209 5,225 5,225 +0.0 Exports 1,864 1,650 1,700 +50.0 Total use 13,748 13,545 13,725 +180.0 Ending stocks 1,731 1,837 1,977 +140.0 Stocks/Use 12.6% 13.6% 14.4% +0.8% Days of Stocks 46.0 49.5 52.6 +3.1 U.S. MYA Price $3.70 $3.60 $3.45 -$0.15 Source: March 2016 WASDE - USDA: WAOB and 2016 Baseline Projections.. USDA is projecting 2016 planted and harvested area to increase 2.0 million and 1.6 million acres, respectively, from 2015 (Table 11). This acreage projection is based on relative crop profitability and not from a farmer survey. Midwest University budgets for 2016 suggest a profitability advantage for corn over soybeans in the Corn Belt on most productive soils which suggests this is a reasonable assumption given current price expectations. The largest increase in use is projected for feed, 125 million bushels, and for exports increasing by 50 million bushels from 2015-16. At this time, projected exports of 1.7 billion bushels reflect the value of the dollar and export competition from South America. Stocks are now projected to increase by 140 million bushels approaching the 2 billion bushel stocks level. The US MYA price is projected at $3.45/bushel down $0.15 from 2015-16 (Table 11). The revised Agricultural Baseline Projections are shown for soybeans in Table 12. USDA s Agricultural Baseline is projecting planted and harvested are both projected to be 200 thousand acres lower from 2015. USDA is assuming a trend yield of 46.7 bushels/acre which is lower than the record yield set in 2015. Assuming acreage reduction and trend yields, the soybean crop of 3.810 billion bushels would be 119 million bushels less than 2015. Given the large projected carry-in, the total soybean supply for 2016-17 is 4.289 billion which is a 139 million bushel increase over 2015-16. The optimistic assumption of soybean exports increasing 135 million bushels from the 2015-16 marketingyear may be difficult to realize given the strength of the dollar and abundant stocks in South America. USDA s Baseline is projecting soybean stocks decreasing slightly but the decline in soybean prices would continue with the 2016-17 U.S. MYA farm price projected at $8.50/bushel which is $0.25/bushel lower than 2015-16. The 2016 wheat Agricultural Baseline Projections are reflecting the pressure of abundant global and domestic stocks. USDA is projecting a reduction in planted and harvested wheat area by 3.6 and 3.7 million acres, respectively, in 2016. Assuming trend yields, the 2016 wheat crop would be 61 million bushels less than the 2015 crop (Table 13). With carry-in for 2016 projected at 966 million bushels, the total supply of wheat for 2016-17 could be 158 million bushels greater than the 2015-16 supply. Table 12. 2016 Baseline Projection for Soybeans Updated February 2016. 2014-15 2015-16 2016/17 Change from Estimated Projected Projected 2015-16 Planted Area (million) 83.3 82.7 82.5-0.2 Harvested Area (million) 82.6 81.8 81.6-0.2 Yield (bushels/acre) 47.5 48.0 46.7-1.3 ------------------- Million Bushels ------------------- Beginning Stocks 92 191 460 +269.0 Production 3,927 3,929 3,810-119.0 Imports 30 30 30 +0.0 Total Supply 4,052 4,150 4,289 +139.0 Crushings 1,873 1,870 1,900 +30.0 Exports 1,843 1,690 1,825 +135.0 Seed & Residual 145 130 125-5.0 Total Use 3,862 3,690 3,850 +160.0 Ending Stocks 190 460 440-20.0 Stocks/Use 4.9% 12.5% 11.4% -1.0% Days of Stocks 18 46 42-3.8 U.S. Marketing-Year Average Price ($/bu) $10.10 $8.75 $8.50 $0.25 Source: March 2016 WASDE - USDA: WAOB and 2016 Baseline Projections.. Table 13. 2016 Baseline Projection for Wheat Updated February 2016. 2014-15 2015-16 2016/17 Change from Estimated Projected Projected 2015-16 Planted Acres (million) 56.8 54.6 51.0-3.6 Harvested Acres (million) 46.4 47.1 43.4-3.7 Yield (bushels/acre) 43.7 43.6 45.9 +2.3 ------------------- Million Bushels ------------------- Beginning Stocks 590 752 966 +214.0 Production 2,026 2,052 1,991-61.0 Imports 149 120 125 +5.0 Total Supply 2,766 2,924 3,082 +158.0 Food 958 967 979 +12.0 Seed 81 66 64-2.0 Feed and Residual 120 150 200 +50.0 Exports 854 775 850 +75.0 Total Use 2,013 1,958 2,093 +135.0 Ending Stocks 753 966 989 +23.0 Stocks/Use 37.4% 49.3% 47.3% -2.1% Days of Stocks 137 180 172-7.6 U.S. Marketing-Year Average Price ($/bu) $5.99 $5.00 $4.20 $0.80 Source: March 2016 WASDE - USDA: WAOB and 2016 Baseline Projections.. USDA is assuming feed use will increase to 200 million bushels which would require wheat prices at a discount to corn. Exports are also assumed to increase 75 million bushels from 2015-16 which suggests either a weaker dollar or a global production issue that shifts exports from more price competitive regions to the United 10
States. With stocks expected to increase again for 2016-17, the U.S. MYA price for wheat is projected to be $0.80/bushel less than the 2015-16 MYA price at $4.20/bushel. These long-term projections are not based on farmers planting intentions but can tell an interesting story on how the corn, soybean and wheat markets could be stuck in a sustained period of low prices unless a production shock can pop prices higher, temporarily. Growing demand is needed to recreate a multi-year price increase like the market experienced from 2006 2013. Such a demand pull has not presented itself yet for these grain markets. Topic 8. How Do I Get on the Email Distribution List to Receive this Newsletter? If you would like to receive each month s newsletter by email, send an email to todd.davis@uky.edu and request to be added to the email 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: http://www.uky.edu/ag/agecon/extcmmu.php 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