Large US Corn Production Again... Now What?

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

At the time of writing this articlemid October - we have just digested yet another USDA monthly supply and demand report. These monthly reports are meant to release timely data on estimated crop sizes and potential usage in the US and around the world. Pre-report "guesstimates" are released to the market approxilI!ately a week prior to the official report, and the trade waits in anticipation of verification of those numbers. The results can swing the market dramatically depending on the news. This data gives us the USDA's best estimate of current supplies and anticipated future production and stocks.

We can draw some general conclusions from these numbers. First, this year's corn crop is estimated to be 10.9 billion bushels, and US corn 2005/06 projected ending stocks are 2.22 billion bushels as of October 12'h. This is a little on the large side. Mother Nature tried to help us out this year by throwing some hot dry weather at the eastern corn belt, but it wasn't wide spread enough. Therefore we are back in roughly the same "pickle" we were last year at this time - managing corn in a heavily supply weighted market. This leads to the question, "What do I do with all my unsold corn?"

By now most of you have already made your store/sell decisions but the following are some further considerations. In Ontario, we have basically four marketing alternatives for harvested corn which is delivered to your elevator: Sell at currently posted cash prices, enter into a storage agreement, do a basis contract, or sell corn and purchase a call option. I urge you to carefully weigh out the pros and cons of each strategy by carefully writing them down on a piece of paper. Start by using an anticipated time line for all comparisons. For this example I'm going to start November 151h and end approximately mid-June.

Option #1 - Sell for cash
Today's cash price for corn is $2.50 (Dec. futures @ 2.05 + .45 basis).

Option #2 - Put corn in Storage*
In elevation $1.50/mt ($0.04/bu), approximate storage $0.05/bulmonth, therefore your cost to carry corn to the end of June would equate to approximately $0.40. You will need to get $2.90 cash for your corn by mid June to break even.

Option #3 - Basis contract
A basis contract is always "fixed" to a futUres month. Make sure you have an understanding of futures spreads since they will determine your future basis levels. On the surface, basis contracts seem great because you are not subject to storage charges. Remember that when the futures month you have your basis established on expires, should you choose to not sell your corn, it will be moved to the next futures month. Your basis will change according to the spread between your current futures month and the next (Dec to March) plus fees established by your elevator for doing so. Often in big crop years this differential (spread) will stay wide, eroding your basis value.

Option #4 - Sell your corn, buy a July call option *
Option premiums are traded every day and are constantly changing but at the time of writing this article a July $2.30 corn call option is trading at approximately $0.15 US or $0.18 Canadian. A July $2.20 corn call is $0.19 US or $0.22 Canadian. Both will expire June 24, 2006.

Those of you with on-farm storage have the ability to capture carry in the market. The difference between current corn prices and prices offered in the future reflect market carry. By pricing corn into the future, you guarantee a future price for your corn and pay yourself for your storage. Producers often mismanage their storage facility by simply filling bins with corn hoping for a rally that mayor may not come. Forward contract your corn for future delivery to secure price. To maintain a long position in the market, reestablish ownership on paper by purchasing a call option. This effectively stops downside risk, yet allows participation in future corn rallies.

All of these marketing alternatives (other than harvest cash sales) should be accompanied by a PLAN. Ask yourself these questions: If I put corn in storage at what price am I a seller? Are my goals realistic and attainable? If I keep rolling my basis forward what futures level do I reward with a sale? What are the costs associated with each strategy? Compare the risks/rewards of each strategy. Once you have thoroughly worked through this exercise, make your decision.

Taking time to pencil your personal options based on your farm operation and cash flow needs will lead to success. Once you've decided on your best alternative it should also be accompanied by an exit plan. Remember
the old adage "Failing to plan can be planning to fail."

*corn storage, elevation, futures and option values are estimations used at the time of writing this article, and could change significantly. Check all values with your elevator personnel or merchandiser before making any marketing decisions.