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Grain prices could be volatile at '03 planting

With USDA projecting U.S. corn acreage at around 2 million more acres than last year, prices might appear to be headed lower in the months ahead, especially if weather cooperates at planting and yields are normal. But prices could just as easily swing the other way with not so favorable weather at planting.

This, plus other uncertainties in the corn market, will likely create some price volatility this planting season.

Giving buoyancy to corn prices are fewer forecast U.S. supplies. In January, USDA projected 2003 U.S. ending stocks for corn at 924 million bushels. That's up 81 million bushels from the previous month, but a long way from 2001's ending stocks of 1.9 billion bushels and 2002's 1.6 billion bushels.

Foreign stocks are headed down, too, from a peak of around 5 billion bushels five years ago to 3.2 billion bushels projected for 2003.

At the other end of the spectrum is concern about corn demand. On Jan. 17, USDA reported that cattle and calves on feed for slaughter at 8 percent below a year ago and 10 percent below two years ago.

And of course, there's the acreage. The commodity research advisory firm, Allendale, Inc., projected recently that U.S. producers will plant 80.6 million acres to corn in 2003. The last time corn acreage was this high was in 1984 when producers planted 80.5 million acres of corn.

With so much uncertainty — and with fairly good prices in the market at the time of this writing — growers should consider pricing some corn, according to Delton Gerloff, Extension agricultural economist at the University of Tennessee.

One tool to consider is using put options to price a small percentage of your corn crop. With such a strategy, “you can lock in a floor, but still take advantage should prices head to the upside.”

Gerloff noted that on Jan. 30, a $2.40 December put option cost about 18 cents. With a put option, if prices head lower, the value of the put option goes up. So whatever you lose in the cash market, you make back on the put option.

If prices move higher, you let the option expire. You lose the 18 cents you paid for the option, but you get to take advantage of the move in prices, selling corn at the higher price.

Meanwhile Allendale forecasts U.S. soybean acreage at 69.76 million acres, the lowest since 1997's 70 million acres. Projected ending stocks at 190 million bushels are 15 million bushels higher than last month, but 18 million bushels lower than last year's ending stocks figure.

So why aren't U.S. soybean prices higher?

Gerloff's pricing equations indicate that foreign stocks are “really knocking the support out from under soybean prices.” And the one area most responsible is South America.

Consider that world ending stocks have risen from 990 million bushels in 1999 to 1.123 billion bushels projected for 2003. Most of those supplies are and will be in Brazil and Argentina. In 1999, South America held 49 percent of the world's ending stocks. It grew to 50 percent in 2000, 53 percent in 2001, 66 percent in 2002, and is projected at 66 percent again in 2003.

Meanwhile the U.S. share of world ending stocks has dropped from 30 percent in 1999 to 17 percent projected for 2003. In effect, the rise in foreign ending stocks has pretty much offset the progress the United States has made in reducing its stocks.

“I think we have to get below 700 million bushels in foreign stocks to get prices moving again,” Gerloff said.

But that assumes that U.S. stocks also remain low. “In 1998, foreign ending stocks were 626 million bushels and we were below $5 on the cash price because we were very high on U.S. stocks that year. But if foreign stocks are below 700 million bushels, we ought to be competitive. But we've got a long way to go.”

So what to watch for in the coming months? Watch government and trade reports on how much corn acreage is going in and where that acreage is coming from. Lower than expected corn acreage could create some pricing opportunities for growers. Any negative news about South America could do the same for soybeans.

And be sure you know your break-even price, Gerloff adds. “Every farmer is different about what price they need, so it's important for the producer to know what he's got in the crop.”

There may be an opportunity for growers to get that price from the market for corn, less so for soybeans.

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