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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.

"When the futures market was at $2.80 per bushel a 'put' cost 24 cents,"
Brees said. "That gives you an option to sell at a future time corn for
$2.80. If the cash price for your grain at market time is less than
that, you collect the difference."

Womack cited another example. "You can go into the market and buy a
December 2006 'put' at $2.50 for a dime. That locks in a price on the
low side. If corn goes below $2.40 you get your dime back, and starts
making money as the price drops.

"If the price goes higher, fine, you sell your corn at the higher price.
Although you lose your dime, it was cheap insurance."

Brees said historical price records show few times that corn prices are
above $2.80 at harvest. "Going back 20 years, it happened only twice and
was close a third time."

Corn prices have been above $3.00 only 10 percent of the months in two
decades.

The situation can go the other way, as well. In 1996, when Russia
started buying corn, the price peaked at $5 per bushel. "We almost ran
out of corn and had only 426 million bushels in stocks following a year
with a short crop," Brees said. "High prices were needed to ration the
strong demand."

Optimism in the futures market is based on expected drop in corn
supplies and increased demand. "A lot can happen between now and
harvest," Brees said. "More corn acres could be planted and yields could
be higher than projected. That would increase the supply on top of
current large supply." In that case, prices would plunge.

"That 1996 price was based on current year supply and demand," Brees
said. "These futures prices are based on speculation of future tighter
supplies and stronger demand."

Producers should at least look at ways to sell part of their crop at
futures prices currently being offered, Brees said.

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.

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