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Crop Market Price Outlook

Crop Market Outlook & Risk Management Strategies December 2009. Utilizing Cash Marketing Tools. Crop Market Price Outlook. Selling Old & New Crop Corn & Soybeans. Steven D. Johnson Farm & Ag Business Management Specialist (515) 957-5790 sdjohns@iastate.edu

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Crop Market Price Outlook

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  1. Crop Market Outlook & Risk Management StrategiesDecember 2009 Utilizing Cash Marketing Tools Crop Market Price Outlook Selling Old & New Crop Corn & Soybeans Steven D. Johnson Farm & Ag Business Management Specialist (515) 957-5790sdjohns@iastate.edu www.extension.iastate.edu/polk/farmmanagement.htm

  2. Presentation Objectives Overview of 2009 Crop Supply/Demand, Price Outlook & Marketing Strategies Review Grain Storage & Cash Marketing Decisions Highlight 2010 Crop Cost of Production Estimates Provide 5 Strategies for Capturing $4/bu Cash Corn & $10/bu Cash Soybean Prices Summarize 5 Strategies & 5 Websites for Managing Crop Risks & Revenue

  3. 193 182 174 53 49 46 161 190 182 177 192 179 51 48 51 52 53 52 Iowa 2009 Crop Yield Estimates Source: USDA Iowa NASS, November 2009

  4. U.S. Corn Supply/Demand & Price 2008-09 Estimated 2009-10 Projected Area Planted 86.0 86.4 Area Harvested 78.6 79.3 Yield 153.9 162.9 Beginning Stocks 1,624 1,674 Production 12,101 12,921 Imports 14 10 Supply, Total 13,739 14,605 Feed & Residual 5,254 5,400 Food, Seed & Industrial 4,953 5,480 Domestic Use, Total 10,207 10,880 Exports 1,858 2,100 Use, Total 12,065 12,980 Ending Stocks 1,674 1,625 Average Farm Price $4.06 $3.25 - $3.85 Midpoint $3.55/bu Source: USDA WASDE, Nov. 10th, 2009

  5. Corn Balance Sheet Source: Wisner, ISU Biofuels Economist, November 2009

  6. Corn Estimates through 2010-11 $4.20 $4.06 $3.75 $3.45 Source: Wisner, ISU Biofuels Economist, November 2009

  7. Nearby Corn Futures Source: www.jimwyckoff.com, Dec. 3rd, 2009

  8. Dec. 2011 $4.32 Corn Futures Carry Dec. 2010 $4.20 December 7th , 2009 Good Carry into spring/summer months – utilize on-farm storage and monitor grain quality Source: www.cmegroup.com

  9. Corn Basis Trends Wider than Normal with Late Harvest Pressure Source: www.farmprogress.com December 2009

  10. Corn Storage Costs .89 Storing until April: Costs an extra 20 to 40 cents .69 .49 .56 .30 .44 .32 .20 Assumption: Corn is Valued at $3.50/bu - Financed @ 7% APR Source: Johnson, ISU Extension, November 2009

  11. Corn & Soybean Storage Issues Source: www.iowagrain.org, November 2009

  12. U.S. Soybean Supply/Demand & Price 2008-09 Estimated 2009-10 Projected Area Planted 75.777.5 Area Harvested 74.776.6 Yield 39.743.3 Beginning Stocks 205138 Production 2,9673,319 Imports 13 8 Supply, Total 3,185 3,465 Crush 1,6621,695 Exports 1,2831,325 Seed 9594 Residual 681 Use, Total 3,0473,195 Ending Stocks 138270 Average Farm Price $9.97 $8.20 - $10.20 Midpoint $9.20/bu Source: USDA WASDE, Nov. 10th, 2009

  13. Soybean Balance Sheet Source: Wisner, ISU Biofuels Economist, November 2009

  14. Soybean Estimates through 2010-11 $10.10 $10.00 $8.95 $8.25 Source: Wisner, ISU Biofuels Economist, November 2009

  15. Nearby Soybean Futures Source: www.jimwyckoff.com, Nov. 13th, 2009

  16. Soybean Futures Carry December 7th, 2009 Nov. 2010 $10.47 Nov. 2011 $10.37 Lack of Carry, little incentive to hold soybeans beyond winter months Source: www.cmegroup.com

  17. Soybean Basis Trends Narrows Post Harvest: Flat through Summer Source: www.farmprogress.com December 2009

  18. Soybean Storage Costs 1.00 Storing until April: Costs an extra 40 to 60 cents .70 .69 .40 .49 .29 .10 Assumption: Soybeans are Valued at $9.50/bu - Financed @ 7% APR Source: Johnson, ISU Extension, November 2009

  19. Percent of Cash Crops Sold by Month Corn Sales: Fall Sales, Peak in January, level rest of year Soybean Sales: Peak in October, High in January, decreases monthly Source: USDA NASS, 1990-09, October 2009

  20. Marketing Decision Chart Futures Increase • Basis Contract • Sell Cash and Buy Futures • Call Options • Minimum Price Contract, Fixed Basis • Store & Wait to Price • Delayed Price Contract • Minimum Price Contract, Variable Basis Basis Weakens Basis Strengthens Expected Change • Hedge • Hedge to Arrive/NBE • Put Options • Cash Sale • Forward Contract Futures Decrease Source: ISU Extension Economics, December 2009

  21. #1: Corn Basis Contract(Replace Cash Sale with March Futures) Deliver Cash Corn and Cut Storage Costs. Fixes the Basis, but not the Futures Price. Elevator/Processor replaces these bushels with a March Futures Contract. Corn example: March ‘10 futures closed at $3.84 the day of the transaction. What is your Potential Price received? Cash selling price - transaction fee – March futures by 3/1= Potential Price $3.64 + -.02 $4.24 (+ $.40) $4.02/bu Source: Johnson, ISU Extension, December 2009

  22. #2 Corn Minimum Price ContractSell Cash Corn & Replace with a Call Option • Also called a Minimum Price Contract • Corn example: Deliver Cash Corn and Cut Storage Costs. Fixes the Basis, but not the Futures Price. Cash selling price is $3.62, May ‘10 futures closes at $3.95, a Call Option with an $4.20 Strike Price has a .23 cent premium. a) What is the Minimum Price received? Cash selling price – call premium – brokerage fee = Minimum Price $3.62 - .23 - .02 $3.37 b) What is the Potential Value of this Call? May Futures in mid-April – Strike Price = Cash Value of Call Option $4.85 - $4.20 $ .65 Source: Johnson, ISU Extension, December 2009

  23. #3 Soybean Minimum Price ContractSell Cash Soybeans & Replace with a Call Option • Soybean example: Deliver Cash Soybeans and Cut Storage Costs. Fixes the Basis, but not the Futures Price via a Call Option. Cash selling price is $9.94, May ‘10 futures closes at $10.69, a Call Option with an $11.00 Strike Price has a .75 cent premium. a) What is the Minimum Price received? Cash selling price – call premium – brokerage fee = Minimum Price $9.94 - .75 - .02 $9.17 b) What is the Potential Value of this Call? May Futures in mid-April – Strike Price = Cash Value of Call Option $12.00 - $11.00 $1.00 Source: Johnson, ISU Extension, December 2009

  24. 2010 Crop Cost Estimates $667 $629 $437 180 bu/a 165 bu/a 50 bu/a Average Yield $3.49/bu $4.04/bu $8.74/bu Cost per bushel Source: Duffy, ISU Extension Economist, December 2009

  25. #4: HTA New Crop Corn Now • Hedge-to-Arrive Contract (fixes futures price but not the basis) • Example: Dec. ‘10 Corn futures closed at $4.20, Fall Harvest Basis next October is expected to be $ - .30 under December corn futures. What is the Expected Cash Price? Dec. ‘10 Corn Futures –Expected Basis = Expected Cash Price $4.20- .30 $3.90 Source: Johnson, ISU Extension, December 2009

  26. #5 Forward Contract New Crop Soybeans Now • Cash Forward Contract (fixes both futures price and basis) • Example: Nov. ‘10 Soybean futures closed at $ 10.47. Fall Harvest Basis next October is offered at $ - .40 under November soybean futures. What is the Forward Cash Contract Price? Nov. ‘10 Soybean Futures – Basis = Forward Cash Contract Price $10.47 - .40 $10.07 Source: Johnson, ISU Extension, December 2009

  27. 5 Strategies for $4 Corn & $10 Soybeans Know Your Cost of Production Learn to Use a Variety of Marketing Tools Pre-Harvest Sell Bushels; Reduce Handling, Storage & Risk Sell In-Town Bushels First, Monitor On-Farm Quality Use Early Sales to Cover Fall/Winter Cash Flow Source: Johnson, ISU Extension, December 2009

  28. Risk Management Web Sites Crop Risk Management - ISU Polk County (Newsletters, Updates and Webcasts) www.extension.iastate.edu/polk/farmmanagement Dr. Chad Hart - ISU Extension Grain Marketing www.econ.iastate.edu/faculty/hart Iowa Grain Quality Initiative – ISU Extension www.iowagrain.org Farm Doc – U. of Illinois Extension www.farmdoc.illinois.edu Ag Decision Maker – ISU Extension (Decision Tools, Newsletters, Publications and Voiced Media) www.extension.iastate.edu/agdm Source: Johnson, ISU Extension, December 2009

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