September 20, 1999
PREPARING FOR NEAR TERM SURPRISES
The size of the 1999 U.S. corn and
soybean crops continues to be a topic of debate. Differences of
opinions are influenced, at least in part, by the discrepancy
between yield models based on crop condition ratings and USDA
yield estimates for some individual states. Those states with
crop ratings suggesting lower yields than estimated by USDA include
those for which the USDA makes objective yield estimates. Given
the subjective nature of crop condition ratings, the USDA methodology
should be superior to the crop condition models. In addition,
early yield reports tend to be in the "better than expected"
category. A few analysts even think the crop estimates might increase.
The USDA will release revised estimates on October 8. Given the
generally early maturity of this years crops, the October
estimates should be close to final production numbers.
As mentioned last week, the USDA
will release a quarterly Grain Stocks report on September
30. For corn and soybeans, September 1 stocks represent marketing
year ending stocks. Corn stocks are projected at 1.699 billion
bushels and soybean stocks are projected at 365 million bushels.
The September report is always important for corn because domestic
feed and residual use is not measured so that quarterly use in
that category is revealed with the stocks report. Use significantly
different than expected can result in a surprise in the report.
For soybeans, use is measured on
a continuous basis, except for the seed, feed, and residual category.
That typically is a fairly constant amount from year to year,
accounting for 5 to 6 percent of total use. Previous stocks reports
this year have revealed a large residual use of soybeans. The
USDA currently carries a residual use projection for the 1998-99
marketing year of 112 million bushels, 40 million larger than
residual use of the previous year. On the surface, the larger
residual use suggests that the 1998 crop was overestimated. In
the past, however, the September report has occasionally "found" some soybeans under similar circumstances.
With the potential for price reaction
to any surprises in the upcoming reports, producers may need to
consider some pre-report strategies. Those strategies will be
influenced by the level of market price in relation to the Commodity
Credit Corporation (CCC) loan rate; harvest progress; and previous
pricing, storage, and marketing loan decisions.
Assuming that corn and soybean prices
remain below the loan rate, producers may not need to make any
decisions for crops which have not been priced and have either
not been harvested or are in storage without a loan deficiency
payment being established. For those crops, a change in price
would be offset by a nearly equal but opposite change in the marketing
loan gain or loan deficiency payment.
Crops at risk include those that
have been priced and a loan deficiency payment not established
(perhaps because the crop has not been harvested) and those for
which a loan deficiency payment has been established, but have
not been priced. After last years experience, there may
not be much of the crop in this category. In the first case, the
risk is that prices will move higher, eroding the marketing loan
gain or loan deficiency payment. Producers can manage some of
that risk by establishing the marketing loan gain now, if the
crop is harvested, or with the purchase of call options. In the
second case, the risk is that prices will move lower, perhaps
resulting in a net price below the CCC loan rate. That risk can
be managed by pricing the crop now, or with the purchase of put
options. Price movement, however, would have to be relatively
large to justify the use of options in either of these situations.
For the crops which have already
been priced and either a marketing loan gain or loan deficiency
payment established, future risk centers around prices moving
higher. This, of course, is always the case after a pricing decision
has been made. There may be a price level low enough to encourage
some re-ownership of those sales.
Some of these tools may also be
used to manage longer term price risk. Current fundamentals do
not point to a significant price increase, but that could change.
Issued by Darrel
University of Illinois