US Crop Production, 2003

Grain Mil. Ac Mil. buCorn 71.1 10,114Soybeans 72.3 2,418Wheat 52.8 2,336Sorghum 7.8 411Barley 4.7 276Oats 2.2 145

Corn 2002-03

Feed/Res53%

Food/Seed/ Industrial

22%

Carryover10%

Exports15%

Soybeans 2002-03

Crush55%

Exports35%

Carryover6%

Seed/feed/res.4%

Wheat 2002-03

Food37%

Exports35%

Carryover20%

Feed/Res.5%

Seed3%

Grain Marketing Channel

Local elevators– Grading, drying, some storage– First pricing point– Some processing (particularly feed)

Subterminal elevators– Concentrate grain for shipment– Limited storage– Purchase from local elevators

Grain Marketing Channel

Terminal Elevators– Processing – Exports

Export terminal elevators– Ocean port or seaway– Limited storage

Grain Pricing Central price discovery point for grain is the

commodity futures markets. Local markets price on a basis to the futures Basis accounts for

– Location: transportation and local supply and demand conditions

– Time: storage cost relative to a futures delivery– Form: type of grain, quality and condition

Grain Pricing

Global supply and demand factor in through the futures market daily

Local prices based on futures through a basis unique to each market

Basis within a market impacted by local conditions

Grain Pricing

Central Iowa corn price and basis the last week of Nov. 1989-98

Price Basis– Average $2.27 -$.42– Minimum $1.88 -$.32– Maximum $2.93 -$.53– Range $1.05 $.21

Storage as a strategy Grain must be dry and stay in condition On farm or off farm Add time utility

Storage advantages

Avoid harvest time low prices Avoid lines at elevator Increases marketing period Helps management of income for taxes Same storage cost for longer storage Allows quality control for livestock feed

Storage Disadvantages

Extra handling of grain Demands extra attention to marketing Risk of grain going out of condition Added investment and tax (on farm) Must finance storage

Drying and conditioning grain

Corn harvested at higher moisture than can be safety stored– No. 2 corn is 15% moisture– Store at 13.5% moisture or less– Harvest losses increase as moisture declines

Storage and drying costs

Harvest mid-October at 19.5% moisture Store until mid-May and sell

Harvest price (15% moisture) $2.30

Extra dry @ $.015/point x 6pts +0.09

Storage (on-farm) $.01/month +0.07

Interest @ 9.0% x 7/12 x $2.30 +0.12

May price needed to breakeven $2.58

Seasonal Price Index for Corn and Soybeans

90%

92%

94%

96%

98%

100%

102%

104%

106%

108%

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Corn Soybeans

Unhedged Storage Return, Beans, On-farm, 1979-80 Through 1997-98, N.C. Ia.

(0.15)(0.10)(0.05)0.000.050.100.15

1 2 3 4 5 6 7 8 9 10

Months of Storage

$ Pe

r B

u., N

et

0%

20%

40%

60%

80%

Net Return per bu.

% Of Years w/Pos.Returns

Unhedged Storage Return, Corn, On-farm, 1979-80 Through 1997-98, N. C. Ia.

-15-10-505

1015

1 2 3 4 5 6 7 8 9 10Months of Storage

Cen

ts/ B

u. N

et

0%10%20%30%40%50%60%

Avg. Gain/Loss

% of Yrs w/Pos.Ret.

Storage: Times of Risk& Opportunity

Storage: Times of Risk& Opportunity

• Opportunity: U.S. Planting Season•• High Risk:High Risk:

Late February-early MarchLast-Half July Until U.S. HarvestLast-Half July Until U.S. Harvest

• Strategy: Sell Before Others Sell

• Plan to Cover Cash Needs Ahead WithCash or Contract Sale, or Futures

Storage: Times of Risk& Opportunity

Storage: Times of Risk& Opportunity

Storage: Times of Risk& Opportunity

• Opportunity: U.S. Planting Season•• High Risk:High Risk:

Late February-early MarchLast-Half July Until U.S. HarvestLast-Half July Until U.S. Harvest

• Strategy: Sell Before Others Sell

• Plan to Cover Cash Needs Ahead WithCash or Contract Sale, or Futures

Other Cash Grain Tools

Marketing loan Loan Deficiency Payment (LDP)

– Can use one or the other but not both

Marketing Loan

USDA program started in 1996 16 crops including corn and soybeans Designed to help farmers market their crop

throughout the year without interfering with basic supply and demand forces

Loan rate set by USDA Grain serves a collateral Nine month maximum loan

Posted County Price (PCP)

Is calculated daily for each county by Farm Service Agency of the USDA

Based the higher of the Kansas City or New Orleans Gulf price

Accounts for transportation back to county

Marketing Loan Repaying the loan

– Prices > loan rate + accrued interest » repay loan + interest

» sell the grain at the higher price

– Price < loan rate + accrued interest» repay loan at the PCP

» keep difference (loan rate – PCP)

» you still own the grain

– Nonrecourse» Deliver the grain and keep the loan payment

Loan deficiency payment Difference between the loan rate and PCP LDP is not repaid Must have ownership of grain Coordinate paperwork with FSA office Unless grain is sold or priced at the time the LDP is

collected the farmer is speculating on the price of the grain

High percent of 1999 corn and beans have taken the LDP

Marketing Loan or LDP

ML is a free price floor (put option)– Guaranteed minimum price (loan rate)– Sell at higher price less storage and interest

LDP has price risk– Hope for falling prices to maximize LDP– Then hope for rising prices to sell grain– Problem arise if markets fall after taking LDP