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Corn+Soybean Digest

High Futures Corn Prices Offer Market Opportunity

Grain markets are sending signals to producers to look at alternative ways of selling their fall crop – for the next three years, say agricultural economists at the University of Missouri.

"There are very mixed signals in the grain markets," says Melvin Brees, of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.

"The cash-grain market has disappointing prices due to weak or wide negative basis," Brees says. "Meanwhile, December futures prices at the Chicago Board of Trade are high, something rarely seen after harvest."

Current cash bids at local elevators in northwest Missouri have been around $2.20/bu. However, December 2006 futures contracts are at $2.86, December 2007 at $3.10 and December 2008 at $3.23.

"You never see these high prices at harvest time," says Abner Womack, co-director of FAPRI. "It's most unusual to have this much optimism in the futures market."

FAPRI economists say high futures prices offer producers opportunities to lock in prices that might not be available at harvest. "The lower corn prices at local elevators are caused by wider than normal basis in those markets," Brees says.

Basis represents cash demand for the commodity and includes transportation and interest costs relative to the current futures price. High fuel prices helped widen basis points this year. However, that accounts for only part of the difference, Brees says.

Current cash prices are held down by large carryover stocks after two years of record corn yields. The market is projected to hold 2.2 billion bushels of corn in ending stocks.

The most recent USDA crop outlook projected 1.1 billion bushels of corn in stocks by next year. That is based in part on growing demand for corn to convert into ethanol and increased export demand.

Also playing in the commodity price rise is heavy buying by index funds that usually invest in other markets. However, this year the funds have bought grain commodities, such as corn, soybeans and wheat. More traditional investments for outside speculators have been precious metals, pork bellies or orange juice.

"Fund buyers don't pay much attention to the fundamentals of the grain markets," Brees says. "If they become disillusioned, that money can leave the market quickly."

Womack says farmers can use the optimism brought to the commodity markets by the outside investors. "Take the price, but protect yourself."

"Farmers entering the commodities market should have grain, or prospect of a crop, to protect their hedge," Brees says. Selling on the futures when the seller holds grain in storage to protect a price is called a "hedge."

Both economists cautioned farmer investors to proceed carefully. "You have to study the market to figure out how to get a price out of it," Womack says. "If you don't understand that, go talk to someone who does understand it."

Brees says selling futures contracts can require farmers to pay margin calls when the price changes. Therefore, he recommends using "puts" and "calls." These are options to sell or buy grain contracts.

"When the futures market was at $2.80/bu. a 'put' cost 24 cents," Brees says. "That gives you an option to sell at a future time corn for $2.80. If the cash price for your grain at market time is less than that, you collect the difference."

Womack cited another example. "You can go into the market and buy a December 2006 'put' at $2.50 for a dime. That locks in a price on the low side. If corn goes below $2.40 you get your dime back, and starts making money as the price drops.

"If the price goes higher, fine, you sell your corn at the higher price. Although you lose your dime, it was cheap insurance."

Brees says historical price records show few times that corn prices are above $2.80 at harvest. "Going back 20 years, it happened only twice and was close a third time."

Corn prices have been above $3 only 10% of the months in two decades.

Optimism in the futures market is based on expected drop in corn supplies and increased demand. "A lot can happen between now and harvest," Brees says. "More corn acres could be planted and yields could be higher than projected. That would increase the supply on top of current large supply." In that case, prices would plunge.

The situation can go the other way, as well. In 1996, when Russia started buying corn, the price peaked at $5/bu. "We almost ran out of corn and had only 426 million bushels in stocks following a year with a short crop," Brees says. "High prices were needed to ration the strong demand."

"That 1996 price was based on current year supply and demand," Brees says. "These futures prices are based on speculation of future tighter supplies and stronger demand."

Producers should at least look at ways to sell part of their crop at futures prices currently being offered, Brees says.
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