November 22, 1999
PROSPECTS FOR CORN AND SOYBEAN
So far in the 1999-00 marketing
year, the cash corn price in central Illinois has traded to a
high of $1.905 (September 7) and a low of $1.675 (October 8).
The price stood at $1.805 on November 19. All of the price recovery
since October 8 has been in the form of basis gain. Futures prices
actually declined by $.06 and the basis narrowed by $.19. For
soybeans, the central Illinois price has traded to a high of $4.935
(September 7) and a low of $4.35 (October 26). The price stood
at $4.48 on November 19. Since October 26, January futures have
declined about $.14, while the basis has narrowed about $.27.
For both corn and soybeans, the basis has narrowed significantly
this month, as suggested in our newsletter two weeks ago. Basis
has narrowed as the rate of farmer selling has slowed.
To date, the trading range in the
cash price of corn in central Illinois for the 1999-00 marketing
year has been $.23 and the trading range in the cash price of
soybeans has been $.585. Based on the price history of the past
26 years, it is very likely that the trading range will be expanded
by the end of the marketing year. For corn, the marketing year
range of the cash price in central Illinois has been a minimum
of $.445 (1990-91) and a maximum of $2.525 (1995-96). The range
was $.60 last year. For soybeans, the marketing year range of
cash prices has been a minimum of $.615 (1985-86) and a maximum
of $5.205 (1976-77). The range last year was $1.92.
New lows in the cash price of corn
and soybeans cannot be ruled out. Those new lows, if they did
occur, would most likely be late in the marketing year under the
scenario of large South American crops and good growing conditions
in the U.S. That was certainly the case last year. After recovering
from harvest lows, both corn and soybean prices established new
lows in the first half of July 1999.
For now, however, it appears that
the trading range will likely be expanded modestly with higher
cash prices. Basis levels are expected to continue to strengthen
until farmers start delivering January sales. That may be in the
last half of December. Futures prices are also likely to get support
from better feed demand prospects stemming from higher livestock
prices and an unexpected increase in the number of cattle on-feed.
Some dry conditions in South America may be supportive as well.
The pace of exports and export sales will provide short term price
direction. Weekly soybean export sales typically remain quite
large through at least December. Sales begin a typical seasonal
decline in January or February if crop conditions are good in
Providing a back drop to all of
the normal market fundamentals for this time of year is the persistent
dryness in the mid-section of the U.S. The market is obviously
very sensitive to whether or not the dry pattern will continue
into the 2000 growing season. This could be a very agonizing winter
as forecasters develop scenarios, provide forecasts, and, in some
cases, spin the outlook.
Marketing strategies for old crop
corn and soybeans seems fairly straightforward – protect against
downside price risk but be in a position to profit from higher
prices. The most straightforward way to do that is to hold inventory
under CCC loan. That is most attractive for corn since cash prices
are approaching the loan rate. There is a good chance that cash
prices will exceed the loan rate during the next four months.
If prices are still under the loan rate in late winter, locking
in the loan repayment rate for 60 days in anticipation of a spring
rally will be an attractive alternative.
For soybeans, the cash price is
still about $.95 under the loan rate. While higher prices may
occur, a move above the loan rate is less likely than for corn.
At least two alternatives are available. First, the loan repayment
rate can be locked in for 60 days (for loans already dispersed).
Using this approach, there is a benefit from any increase in price,
whether or not prices move above the loan rate. Second, producers
might collect the loan deficiency payment and use options to protect
the price. For farm stored soybeans, retaining ownership and buying
put options might be preferred. For commercially stored beans,
selling the crop and buying call options might be preferred. Using
at-the-money options gives downside price protection, but also
provides some profit even if subsequent price rallies are not
above the loan rate.
Issued by Darrel
University of Illinois