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Looking ahead to forward pricing opportunities for '08 crops

Agriculture.com Staff 08/28/2008 @ 8:00am

Grain prices have been in a steep slide over the past two months. Concerns have waned about yield losses as a result of the early season floods, and now most are expecting normal to perhaps even better than normal crop yields for the forthcoming harvest. Since July 4, corn futures plummeted nearly $3 a bushel, although they've bounced back a $1 a bushel over the last few weeks of trading. Meanwhile, soybeans gave up $4 a bushel but have managed a $1.50 bounce in the recent recovery.

A full-fledged recovery to the highs set back in early July seems unlikely at this juncture. The market seems prone to trading to the downside and with the summer quickly running out there seems like little incentive for traders to push price levels higher. As such, it seems like an opportune time to explore forward pricing opportunities for new-crop corn and beans. Should you price your crop for harvest delivery or hold on to it and face added storage costs?

This year in particular it will be important to gauge your cost of storage. Higher energy costs mean added costs for drying and storing the grain, even if on-farm storage is an option. Second, holding $13 soybeans and $6 corn is a lot more costly then holding $6 soybeans and $3 corn. If you are borrowing money such as on an operating loan at 8%, then holding corn or beans instead of paying back those loans is costing you 4 cents per month for corn and 8.7 cents per month for soybeans. So, adding on to that a 3-cent per bushel monthly cost of storing grain would put your monthly storage charge at around 7 cents a month for corn and 12 cents a month for soybeans -- a pretty hefty price tag to overcome.

Will the market guarantee you 7 cents (12 cents) a month for storing corn (soybeans) this year? To answer that question, we examined what elevators, ethanol plants, river terminals and other grain buyers are paying for various forward contracts after harvest. The analysis is based on same-buyer comparisons from one month to the other to assure consistency in quoted spreads.

The results for corn are presented below. The figures give the price spread from October to various contract delivery months in the cash market, averaged across grain buyers in each state. For example, using Iowa, December forward contracts are on average 9.1 cents a bushel higher than the October price (i.e., delivering at harvest). Storing it until March, you could lock in an extra 24.3 cents a bushel over the harvest-time price in Iowa.

So, does it pay to store or would you be better off selling at harvest? The answer appears to depend on where you farm. Western Corn Belt states have limited opportunities for storing at a profit. In fact, only in South Dakota could you earn a positive storage return when you factor in costs -- this occurs in January, where you would earn an extra 2.7 cents a bushel over storage costs. In the eastern Corn Belt states of Illinois, Indiana and Ohio, storage seems more feasible. Storing corn until January seems to be the best option and makes an extra 5 to 9 cents a bushel over storage costs.

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