US Crop Production, 2007Grain Mil. Ac Mil. buCorn 86.5 13,074Soybeans 62.8 2,585Wheat 52.1 2,067Sorghum 6.8 505Barley 3.5 212Oats 1.5 92

US Corn Acres and Yield

020406080

100120140160180

1994

-95

1995

-96

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

Harvested Acres (Millions) Bushels per acre

113.5160.4

US Corn Utilization, 2007-08

Feed & Resid41%

Exports17%

Carryover10%

Food, Ind, Seed32%

US Corn Utilization (Million Bushels)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1994

-95

1995

-96

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

Feed & Residual Food,Industrial, and Seed Exports Carryover

Food, Industrial, and Seed Use of Corn

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

1994

-95

1995

-96

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-080%5%10%15%20%25%30%35%40%

Million Bushels % of Production

US Soybeans, Acres and Yield

01020304050607080

1994

-95

1995

-96

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2005

-06

2006

-07

2007

-08

Harvested Acres (Millions) Bushels per Acre

33.9

42.5

US Soybean Utilization, 2007-08

CRUSH58%

CARRYOVER4%

Exports32%

OTHER6%

US Soybean Utilization (Million Bushels)

0500

1,0001,5002,0002,5003,0003,5004,000

1994-95

1995-96

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2005-06

2006-07

2007-08

Crush Exports Other Carryover

US Wheat Acres and Yield

0

10

20

30

40

50

60

70

1994

-95

1995

-96

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

Harvested Acres (million) Bushels per acre

35.1 44.2

US Wheat Utilization, 2007-08

Exports47%

Food34%

Seed3%

Carryover10%

Feed & Resid6%

US Wheat Utilization

0500

1000150020002500300035004000

1994

-95

1995

-96

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

Feed and Residual Food Seed Exports Carryover

Grain Marketing Channel Local elevators

– Often initial collection point for grain– 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

++++++ Rail

•Mississippi River &Tributaries in the Midwest•Columbia & Snake Riversin the West

•CSX, Norfolk Southern and Illinois Central (part of CN) in the East•BNSF and UP in the West

Transportation Decisions Alter place or location utility Must compare price difference to cost

difference High first cost and lower marginal cost

– Fixed amount to load commodity– Lower marginal cost of extra miles

Cost difference by type of transportation

Truck Transportation Low fixed – high variable

– 90% of cost is fuel, wages, and maintenance– Trucker doesn’t invest in the road

Dominate short haul choice Grain shipments by tuck increasing

– Regional grain processing– Consolidation of livestock production

Rail Transportation High fixed cost – low variable

– Rail line owns tracks and terminals– Fixed costs may be 30-50% up to 70% of

total costs Economies of size in labor and

switching cost so movement to “unit” trains (100 cars).

Differential pricing for large and small customers

Barge Transportation Low fixed cost – low variable cost

– 25,000 miles of inland waterways– 6 miles per hour travel speed.

70% of exported grain moves down the Mississippi River

Transportation Unit ComparisonGrain transportation cost by method

Average Miles

Hauled

Tons per

Unit

Bushels per

UnitTruck 86 26 910Rail 674 100 3,500Barge 891 1,500 52,500100 Car Unit Train 10,000 350,00015 Barge Tow 22,500 787,500

Transportation Shares and Fuel Efficiency

Grain transportation

Truck Rail BargeTons Hauled 66.4% 17.6% 8.3%Ton-Miles 16.6% 44.1% 27.4%

Ton-Miles per Gallon 59 202 514

Bulk to Container Shipping Move from commodities to HVP

– For example, identity preserved (IP) grain Can handle small lots In 2002 52% of ag trade value was shipped

by containers compared to 15% of the weight.

Farmers may market container loads of grain direct to customer

Container shipping

http://www.usda.gov/oc/photo/96c0468.jpg

Container Advantages Less handling of grain thus less damage Container acts as storage Can be transported on container train or ship Faster delivery time to final customer Good backhaul rates from Asia due to trade

imbalance– 40% utilization rate going to Asia– 100% utilization coming from Asia

Storage as a strategy Grain must be dry and stay in condition On farm Off farm at elevator Add time utility

On Farm Storage Advantages Avoid harvest time low prices Avoid lines at elevator Increases marketing period Helps management of income for taxes Low marginal cost for longer storage Allows quality control for livestock feed May be needed for IP grain

On Farm Storage Disadvantages Extra handling of grain Risk of adverse price change while in

storage (may be offset with hedging) Risk of grain going out of condition Added investment and tax (on farm) Must finance storage (opportunity cost of

the money tied up in grain)

Drying and conditioning grain Corn harvested at higher moisture than

can be safety stored– Harvest may begin with moisture at 20-25%– No. 2 corn is 14.5% moisture– Store at 13.5% moisture or less to avoid

spoilage and storage loss– Harvest losses increase as moisture declines

» Drying in the field reduces drying cost but increases harvest loss

Storage and drying cost example Harvest mid-October at 19.5% moisture Store until mid-May and sellHarvest price (14.5% moisture) $2.30Extra dry @ $.02/point x 1 pt +0.02Storage (on-farm) $.01/month +0.07Interest @ 9.0% x 7/12 x $2.30 +0.12May price needed to breakeven $2.51

Iowa Corn and Soybean Price Index, 1995-2004

90

95

100

105

110

S O N D J F M A M J J A

Corn Soybeans Average

On Farm Corn Storage Return From September1989-90 to 2004-05 Crop Years

0%

10%

20%

30%

40%

50%

60%

70%

O N D J F M A M J J A$(0.15)

$(0.10)

$(0.05)

$-

$0.05

$0.10

$0.15

Percent Positive Net Storage Return

Storage cost at $.01/month plus 7% interest on initial value

On Farm Soybean Storage Return from September1989-90 to 2004-05 Crop Years

0%

10%

20%

30%

40%

50%

60%

70%

O N D J F M A M J J A-$0.30

-$0.20

-$0.10

$0.00

$0.10

$0.20

$0.30

$0.40

Percent Positive Net Storage Return

Storage cost at $.01/month plus 7% interest on initial value

Other Cash Grain Tools USDA Farm Program Tools

– Marketing loan– Loan Deficiency Payment (LDP)– Can use one or the other but not both on the

same bushel of grain

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

crop throughout the year by providing the farmer a loan until the grain is sold

Grain serves a collateral Nine month maximum loan

Two Price Components Loan Rate

– Amount that the commodity is valued at– Set by USDA

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

How it works Farmer borrows from government after

harvest at the loan rate Pays back at later date at the PCP

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 Collect at any time before it expires Unless grain is sold or priced at the time the

LDP is collected the farmer is speculating on the price of the grain

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

Expected Returns and Risks of Alternative Marketing Strategies 

Marketing Alternative LDP Now + Put Under Loan + LDP, Hedge, and Store Until Summer Store Until Summer Store Until Summer

Expected Revenue  $51,875.20 $44,304.23 $51,675.00

5% chance that revenue will be below $39,525.41 $32,000.00 $50,113.5910% chance that revenue will be below $41,816.80 $34,121.20 $50,441.1025% chance that revenue will be below $45,939.84 $38,244.23 $51,033.9750% chance that revenue will be below $51,216.95 $43,521.34 $51,688.3475% chance that revenue will be below $57,003.88 $49,308.27 $52,293.9890% chance that revenue will be below $62,992.82 $55,297.21 $52,875.1295% chance that revenue will be below $66,664.02 $58,968.42 $53,266.58

Marketing Loans and LDP WTO ruled that cotton LDP is “trade

distorting Provides US farmers with minimum

price guarantee Reducing risk may lead to a shift in the

supply curve

Grain Marketing Summary Major users of grain Transportation system and basis

– Place utility Storage costs and returns

– Time utility Government marketing programs