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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 [email protected]

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Crop market price outlook

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) [email protected]

www.extension.iastate.edu/polk/farmmanagement.htm


Presentation objectives

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


Crop market price outlook

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


Crop market price outlook

U.S. Corn Supply/Demand & Price

2008-09 Estimated 2009-10 Projected

Area Planted 86.0 86.4

Area Harvested 78.6 79.3

Yield153.9 162.9

Beginning Stocks1,6241,674

Production12,10112,921

Imports 14 10

Supply, Total13,73914,605

Feed & Residual 5,254 5,400

Food, Seed & Industrial 4,953 5,480

Domestic Use, Total 10,20710,880

Exports 1,858 2,100

Use, Total 12,06512,980

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


Corn balance sheet

Corn Balance Sheet

Source: Wisner, ISU Biofuels Economist, November 2009


Crop market price outlook

Corn Estimates through 2010-11

$4.20

$4.06

$3.75

$3.45

Source: Wisner, ISU Biofuels Economist, November 2009


Nearby corn futures

Nearby Corn Futures

Source: www.jimwyckoff.com, Dec. 3rd, 2009


Crop market price outlook

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


Corn basis trends

Corn Basis Trends

Wider than Normal with

Late Harvest Pressure

Source: www.farmprogress.com December 2009


Corn storage costs

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


Crop market price outlook

Corn & Soybean Storage Issues

Source: www.iowagrain.org, November 2009


Crop market price outlook

U.S. Soybean Supply/Demand & Price

2008-09 Estimated2009-10 Projected

Area Planted 75.777.5

Area Harvested 74.776.6

Yield 39.743.3

Beginning Stocks 205138

Production2,9673,319

Imports 13 8

Supply, Total3,1853,465

Crush1,6621,695

Exports1,2831,325

Seed 9594

Residual 681

Use, Total3,0473,195

Ending Stocks 138270

Average Farm Price$9.97 $8.20 - $10.20

Midpoint $9.20/bu

Source: USDA WASDE, Nov. 10th, 2009


Soybean balance sheet

Soybean Balance Sheet

Source: Wisner, ISU Biofuels Economist, November 2009


Crop market price outlook

Soybean Estimates through 2010-11

$10.10

$10.00

$8.95

$8.25

Source: Wisner, ISU Biofuels Economist, November 2009


Nearby soybean futures

Nearby Soybean Futures

Source: www.jimwyckoff.com, Nov. 13th, 2009


Crop market price outlook

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


Soybean basis trends

Soybean Basis Trends

Narrows Post Harvest:

Flat through Summer

Source: www.farmprogress.com December 2009


Soybean storage costs

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


Percent of cash crops sold by month

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


Marketing decision chart

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


1 corn basis contract replace cash sale with march futures

#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


Crop market price outlook

#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


Crop market price outlook

#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


2010 crop cost estimates

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


Crop market price outlook

#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


Crop market price outlook

#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


Crop market price outlook

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


Risk management web sites

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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