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LDPs focus in much grain marketing

No. 1 question: `What week do I take the loan deficiency payment?'

For years, farmers have called on Virginia Tech's David Kenyon and other marketing specialists for advice on the best strategies for pricing their crops.

But, there has been a decided shift in the nature of the questions in this era of growing crop surpluses and seemingly endless low prices, says Kenyon, professor of agricultural economics at the university.

"The No. 1 question I get these days is what week do I take the LDP?" he said in a presentation on feed grains and wheat at the Southern Regional Agricultural Outlook Conference in Atlanta.

Kenyon says it's more than just a coincidence that loan deficiency payments or LDPs have become an increasingly important marketing tool for corn producers since Congress passed the Federal Agricultural Improvement and Reform Act of 1996 or Freedom to Farm.

In 1995, the last year of the old farm bill, corn farmers had to set aside 7.5 percent of their acres. Yields were down and the total supply for the 1995-96 marketing year fell to an unusually low 8.9 billion bushels.

"By April of 1996, we had $5 corn at Virginia elevators," said Kenyon. "The poultry feeders and contract hog producers were not happy."

With the passage of Freedom to Farm that spring, corn acres rose from 1995's 71.2 million acres to 79.5 million. Farmers have continued to plant between 79 million and 80 million acres except for a slight drop in 1999.

"It's important to see what's been happening to the total available supply each year since they passed the new farm bill," he said. "This year, the forecast is for over 12 billion bushels. So, it's still going up." (See accompanying chart.)

"But, if you look at total use, this line isn't going up nearly as fast. This is why we keep increasing stocks every year, and this is why prices are so low."

Other factors such as the Southeast Asia economic crisis (1997-98) have also had an impact. "The first report USDA put out that year had 2.2 billion bushels for exports," Kenyon noted. "Then the crisis hit, and we finished the year with 1.5 billion bushels.

"The problem is we still have lots of feed grains worldwide," he said. "U.S. ending stocks dropped off a little bit last year (to 1.769 billion bushels), but not enough to give you much hope that we're going to have any surge in exports soon."

Last spring, most analysts thought corn acres would be down in 2000, and forecasts of a Midwestern drought had the markets showing some excitement. But, USDA reported another 2 million acres of corn in June, bringing the total planted acreage to 79.6 million. In July, it started raining - everywhere but the Southeast.

"So, first we get more acres, then rain and higher yields," says Kenyon. "Now, we have 12 billion bushels of corn available this fall. To put that into perspective, that's what we had in 1985 and 1986, the last time we had $1.50 corn."

Even in the Southeast, where drought has taken a toll on cotton, peanuts and soybeans, corn production suffered very little. Only in Alabama, where drought conditions early had a severe impact on corn yields, has total production dropped significantly (from 1999's 20.6 million to 11.2 million bushels).

"Listening to the news and reading some of the marketing newsletters, I figured that there would be no corn because of the drought," he said.

"But in Virginia, we're going to have twice what we had last year" (40.5 million vs. 21.8 million).

Besides the questions about when to take the LDP, some producers are asking if they should store corn through the winter with the hope that prices will improve enough by March, April or May to improve their bottom line.

Given the fact that the available supply could total 500 million more bushels in 2000 than in 1999, Kenyon isn't optimistic. But, he backs his apprehension with historical data on price changes over the last 18 years.

"I have told our growers that they need to make storage decisions based on basis changes because if we look at the average price increase over the last 17 or 18 years, it has not paid to store corn," he said. "We harvest corn at 15 to 20 cents above the low price, and then to sit there and wait for the price to go up, most of the time it doesn't pay."

The exception might be when cash prices are low at harvest. "You would think you would have less risk because with low prices you have a reasonably good probability that prices will go up."

Unfortunately, in 1985-86 and 1986-87, the two years most like 1999-2000 in terms of available supply, prices gained only 19 and 11 cents per bushel from October to March. That would not be enough to offset the 4 cents per bushel per month cost for storing corn.

He has a similar reaction to the often recommended strategy of selling the grain for cash and buying a May call option.

"If you look at the results of buying a call on Sept. 15, which is the normal time for our peak harvest, and selling it on March 15, you find only two or three years where the call options made money."

When Kenyon spoke on Sept. 26, the average cash price at southeast Virginia elevators was $1.67 per bushel. May futures were then trading at $2.10 per bushel, so they had a 40-cent price increase built into them.

"For this strategy to work well, prices have to go up 40 cents to get your premium back," he noted. "This strategy is recommended to a lot of people. I've had some producers tell me that if they follow it, they know the most they can lose is the 14-cent premium. I guess there is some comfort in that."

Kenyon said that although the recent emphasis seems to be on timing loan deficiency payments, he believes farmers can still benefit from a well-thought out marketing plan that includes hedging or other forward contracting tools.

The day before he spoke, Memphis, Tenn.-based Sparks Commodities, Inc., issued a report to its customers that projected 2001 corn acres to be 1.5 million less than in 2000 because of a shift in acres back to grain sorghum.

"Basically, that says we will still have a lot of corn around if those numbers are right, but it could cause some excitement," he noted.

The 1998, 1999 and 2000 December corn futures charts show that prices peaked out at $2.70 per bushel in each of those years. "So, producers had a lot of chances to price corn at $2.50 to above $2.50 and a few chances to price near $2.70 per bushel.

"If what Sparks is saying is right, then my initial cut would be to tell producers that if they look today, they will see December 2001 futures at $2.30 per bushel," he said.

"But, I think that's too low to begin pricing if we're to see a reduction in acres. I would tell them to wait until $2.50 per bushel.

"If we get lucky and have a reduction in acres and any yield problems, they will probably get another shot at $2.70 again in 2001."

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