Futures corn prices offer marketing opportunity of fall crop
Grain markets are sending signals to producers to look at alternative ways of selling their fall crop -- for the next three years, say agricultural economists at the University of Missouri.
"There are very mixed signals in the grain markets," says Melvin Brees, of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.
"The cash-grain market has disappointing prices due to weak or wide negative basis," Brees said. "Meanwhile, December futures prices at the Chicago Board of Trade are high, something rarely seen after harvest."
Current cash bids at local elevators in northwest Missouri have been around $2.20 per bushel. However, December 2006 futures contracts are at $2.86; December 2007 at $3.10 and December 2008 at $3.23.
"You never see these high prices at harvest time," said Abner Womack, co-director of FAPRI. "It's most unusual to have this much optimism in the futures market."
FAPRI economists say high futures prices offer producers opportunities to lock in prices that might not be available at harvest.
"The lower corn prices at local elevators are caused by wider than normal basis in those markets," Brees said.
Basis represents cash demand for the commodity and includes transportation and interest costs relative to the current futures price. High fuel prices helped widen basis points this year. However, that accounts for only part of the difference, Brees said.
Current cash prices are held down by large carryover stocks after two years of record corn yields. The market is projected to hold 2.2 billion bushels of corn in ending stocks.
The most recent USDA crop outlook projected 1.1 billion bushels of corn in stocks by next year. That is based in part on growing demand for corn to convert into ethanol and increased export demand.
Also playing in the commodity price rise is heavy buying by index funds that usually invest in other markets. However, this year the funds have bought grain commodities, such as corn, soybeans, and wheat. More traditional investments for outside speculators have been precious metals, pork bellies or orange juice.
"Fund buyers don't pay much attention to the fundamentals of the grain markets," Brees said. "If they become disillusioned, that money can leave the market quickly."
Womack said farmers can use the optimism brought to the commodity markets by the outside investors. "Take the price, but protect yourself."
"Farmers entering the commodities market should have grain, or prospect of a crop, to protect their hedge," Brees said. Selling on the futures when the seller holds grain in storage to protect a price is called a "hedge."
Both economists cautioned farmer investors to proceed carefully. "You have to study the market to figure out how to get a price out of it," Womack said. "If you don't understand that, go talk to someone who does understand it."
Brees said selling futures contracts can require farmers to pay margin calls when the price changes. Therefore, he recommends using "puts" and "calls." These are options to sell or buy grain contracts.