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Cash Crop Prices Not Keeping Up With Farm Futures
Soybean prices have jumped in recent weeks due to adverse weather in South America and more recently decreased carryout forecasts by the Department of Agriculture, but farmers in the U.S. aren’t seeing the same gains when selling their cash crops.
Soybean futures that have jumped 25% year-to-date and corn that’s up almost 6% since the start of March on the Chicago Board of Trade, however, aren’t being reflected at elevators as immediate corn and soybeans remain well supplied in the U.S. With producers barely able to break even and in some cases suffering heavy losses, many are wondering when they’re going to see similar price gains on the farm.
Growers commenting in Agriculture.com’s Marketing Talk said they’re being offered cash corn prices 36¢ below futures and for soybeans, as much as $1.20 under futures. Some said they plan to hold onto crops until cash prices at least start rising.
“If it were today’s board prices, I would hold and hope they get better,” said one farmer. “With the weather this year so far, I am not inclined to think we will not raise what the USDA is projecting. I may be wrong, but I think prices will be higher at some point before harvest.”
The USDA on Tuesday lowered its outlook for soybean stockpiles by 10% month-over-month to 400 million bushels, missing analyst expectations for 426 million, and the agency said inventories at the end of the 2016-17 season will drop to 305 million bushels.
That gave soybean prices a much-needed boost in Chicago but didn’t move cash prices a whole lot. The reason is because buyers know they don’t need to pay up right now for crops and likely won’t until supplies start to dwindle, said Jeff Kaprelian, the trade desk manager at The Hueber Report in Sycamore, Illinois.
Doug Prohaska, a senior commodity risk manager at INTL FCStone Financial in Kansas City, Missouri, whose family still farms in Iowa, said farmers in his area are getting around 20¢ a bushel less for corn than the price they’re seeing on the Board of Trade.
Globally, stockpiles at the end of the current marketing year for corn and beans are forecast at or near records, according to the USDA, meaning buyers can stand firm on lower prices – for now.
It wasn’t just fundamental factors that underpinned prices.
Futures rallied as fund managers stacked on long positions. As of last week, speculative investors were net-long by 172,997 soybean contracts – the largest such positions since April 2014 – and 63,298 corn contracts, only the second week since November they held more long positions than short positions.
That propped up futures, but the fundamental picture on the farm didn’t change much, leaving farmers unable to grasp the rally on the board.
“The cash price is almost the same as it was prior to the rally,” Prohaska said. “The thing most people underestimate is the power of money moving into and out of commodities. It was mostly money flow in this case.”
A weakening dollar also has given futures a boost since fund managers expect this will improve demand for U.S. supplies. While that’s a logical theory, and export sales have improved moderately for corn and soybeans in recent weeks, grain buyers will need to see more evidence of purchases by overseas importers before they offer more cash to farmers.
Another factor boosting futures prices is the threat of dry weather, but right now that’s just what it is – a threat. Forecasters have said there’s a good chance a La Niña weather pattern that often leads to hotter, drier weather in the Corn Belt will make its way into the Midwest this summer, and that could have a major impact not only on futures but also cash prices, Prohaska said.
Kapralian said cash prices likely won’t start to improve until summer when supplies in the country start to dwindle. Only then will farmers be able to see the gains realized by investors trading futures.
“At the end of the day, cash prices will reflect the actual need,” he said. “If the board is not doing its job of rallying prices, then the basis will have to improve, but if the board rallies and the market doesn’t need corn, the basis will weaken.”
To take advantage of the price rally on the board, growers should write so-called hedge-to-arrive contracts that will allow them to take advantage of strong futures prices. The basis – the difference between the cash price and futures price – will improve as the summer wears on because supplies available immediately will decline, Kaprelian said.
If the basis improves 10¢ between now and July, for example, growers can presell their corn at a dime higher than what they’re getting now and, assuming they have ample storage, hold onto their corn or beans until delivery.
“They’re locking in the futures price to take advantage of the rally on the board, with the expectation that basis will improve,” Kaprelian said. “Basis will vary throughout the country, but generally this time of the year is not a good time to be doing cash. Do an HTA, and lock in the futures price later in the year.”