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Corn+Soybean Digest

A Year Of Opportunities Ahead

Looking at the price of corn and soybeans, some of you may not believe the headline above. But it's true. The opportunities for financial success for corn and soybean growers have seldom been better than they are right now. The only people who don't believe so are those who confuse price per bushel with profits and assume they are synonymous. That's not the case!

The rules have changed. More producers are learning every day that the Freedom to Farm Act has changed the rules of marketing forever. The marketing loan aspect of the last farm bill is a dramatic change from anything we've used in the past.

Simply put, the use of loan deficiency payments (LDPs) allows you to collect the difference between your posted county price (PCP) and the local loan rate, rather than putting grain under loan when your PCP is under the loan rate.

Another big change is that forfeiture of grain that has been put under loan is almost always a less attractive option than before. For example, if your PCP for corn drops to $1.50 and your loan rate is at $1.89, you merely pay back the loan at $1.50 and pocket the difference of 39 cents. However, the corn is yours to sell. You don't hand it over to the government. Consequently, everyone is faced with downside price risk.

Incomes will vary widely. This is a year, in my opinion, when knowing how to pick a bottom in the corn and soybean markets will be as profitable as knowing how to pick a top. Incomes are going to vary enormously this year in grain marketing because, unfortunately, many producers have not recognized the change in marketing rules.

Instead, many producers have viewed LDPs as free money from the government and have taken advantage of this opportunity much too early. Producers have been LDPing corn at almost three times the rate they've been putting it under loan. And there have not been any good opportunities to LDP corn since mid-October. This means that a lot of corn has been LDP'd for a small amount of money.

The accompanying tables show two different strategies used by Farmer A and Farmer B. They indicate how gross sales for corn and soybeans could easily vary by $1/bu over the coming months.

In my example, I'm making a few assumptions about market price moves that you may or may not agree with. That doesn't really matter in this case. What matters is understanding the difference between how two different farmers play the marketing game this year.

I'm assuming that, between now and springtime, both corn and soybean prices will move lower. Since this is a La Nina year, I am also assuming that in June and July we could have significant price rallies. The magnitude of the moves could be significant in either direction, but I've kept my estimates of both the downward price move and the upward price move modest.

Farmer A has figured that this is a year to pick a bottom in the market. He's also recognized that the major price trend is down. He consequently sells July corn futures at $2.30 and soybean futures at $5.40. Between now and May 1, he exits the corn at $2 for a 30-cent profit and exits the beans at $4.80/bu for a 60-cent profit.

During this time, however, he needs money to farm. He puts the corn under loan at $1.89 and beans under loan at $5.26. When these markets are making a bottom, his PCP on corn is $1.59 and on soybeans it's $4.50. That nets him a marketing loan gain of 30 cents on corn and 76 cents on soybeans. If he doesn't need the money and consequently does not put the grain under loan, he could instead collect his LDPs for the same amount on the same day.

He then waits for the market to rally on weather concerns through the month of June and sells around the 4th of July holiday. He gets $2.15 for his cash corn and $5.20 for his soybeans. You can see the results of the entire marketing program in the table - he ends up netting $2.75 for his corn and $6.56 for his soybeans.

Unfortunately, many producers have plans more similar to Farmer B's.

This farmer collected his LDPs early and has also assumed prices couldn't go down, but they have. What could easily happen is that Farmer B, having collected the LDPs early, then panics and sells near a bottom. As you can see in the table, this is a way that a producer could net $1.68 for corn and $4.64 for soybeans, even though the loan rates are considerably higher.

This example is not meant to predict where prices are headed over the next few months, but merely to show how widely net selling prices are going to vary over the coming year based upon how each individual producer plays his cards.

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