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Corn+Soybean Digest

Count On Contracts

Is it worth booking new-crop cash corn at $2.20 in late June? Lynn Chrisp sure thought so, especially after timely rain fell on much of the Midwest in mid-summer.

And when the July 1 USDA production report forecast a bumper of bumper crops for 2003, he was even more happy with his early marketing decisions.

Chrisp farms near Kenesaw, NE, and regularly uses forward contracts and options to market his corn. In nearby Ayr, NE, Scott Hinrichs depends mostly on forward contracts for his corn, but bases his marketing strategy off Chicago Board of Trade futures prices.

Both have one thing in common. Much of their production is white corn that brings a stout premium over No. 2 yellow. “If the yields are there, then it's really a good crop for us,” says Chrisp, who markets his white corn through area Cargill and Cooperative Producers Incorporated elevators.

Hinrichs, who markets his corn through a local Hastings, NE, company, Flat Water Milling, usually stores all his white corn on-farm until it's time to deliver. “I look for the best opportunities to price it far into the next year, when supplies are usually lower and prices are seasonally stronger,” he says.

Chrisp, whose irrigated yields are in the 185-bu. range, pulled the trigger on 75% of his white corn and much of his yellow corn on June 20 when December futures were in about the $2.40-2.45 range. “A lot of futures funds went short the market then,” he says. “The market started going down, so I forward contracted corn in a $2.20 cash price for delivery at harvest. There should be a nice premium over that for white corn.”

His white corn decisions are often based on the type of premium food corn will bring, as well as the local corn basis. White corn usually brings 15-20¢ over the yellow corn price in the end. The local corn basis is 20-30¢ under December futures. “If local supplies are tight, it can narrow to the 15¢ under range,” says Chrisp.

Even though USDA forecast the largest corn crop on record — 10.27 billion bushels on July 1 — the December futures price showed little reaction. Apparently, the bumper crop forecast was already figured into prices that dropped from above $2.45 in mid-June to about $2.16 on July 11, the day the crop report was released.

Chrisp was considering using call options to take advantage of any bounce in the market in the event of late summer weather problems. “That would help me lock in an early LDP that could be better than what I would see at harvest,” he says.

Hinrichs was not overly concerned about the June swoon in prices. That's because he has sufficient storage to handle his entire crop. “We had forward contracted about 25% of our white corn for fall delivery at 20¢ over the current new-crop cash price,” he says.

“Also, we know there are usually some good opportunities to market white corn within six or seven months after harvest,” says Hinrichs. “Research shows there are normal price increases in the late winter, spring and early summer for up to July deliveries.”

In the event that prices take an unexpected upward trend leading to harvest, he hopes to roll his locked-in prices to a higher level.

“I like to go with forward contracts instead of futures or options,” says Hinrichs. “I may consider using the Board at some time, but right now I'm more comfortable with contracts and on-farm storage.”

When USDA projected the 10.27 billion bushel crop, it also increased its average national yield to more than 142 bu. The good news for markets was it also increased the projected feed and ethanol use. Both those projections were no real surprise, says Alan Kluis, of Northstar Commodity Investment, St. Paul, MN.

“It looks like we'll have a lot of cattle and hogs,” he says, noting that growers should watch closely for late '03 and early '04 marketing opportunities.

“If December corn goes to $2/bu., growers need to probably take a look at some call options to protect their upside and their potential LDP payment,” says Kluis. “We still have a chance for a weather rally, due either to diseases or heat.”

He adds, “It will be difficult to see December corn back in the $2.48-2.50 level. But if growers can get $2.50 December or $2.55 for March '04, they should consider some hedging with futures contracts. If growers have storage available, they should use the March contract and wait for a possible basis improvement.”

Darrel Good, University of Illinois grain marketing economist, says with the high production forecast, “we would be happy to have the opportunity to sell corn above the loan rate. It's hard to advocate a lot of sales below the loan rate.”

But like Kluis, he feels any weather rally could create a better marketing environment.

“If we get the price level above loan, growers should take a hard look at additional sales. Those with on-farm storage might find some forward bids attractive,” he says.

“Look for premiums for forward delivery and make sure they can cover the cost of storage,” says Good. “If prices reach $2.40 or above for the March contract, they should look to market at those levels. But again, about anything above the loan rate would be attractive.”

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