Courtesty of SDSU Extension
At some point, we knew that large inversion between old crop and new crop prices would converge, and that it would likely be a relatively fast change. However, the suddenness and speed with which that occurred over the last couple weeks was still shocking, said Darrell R. Mark, Adjunct Professor of Economics at South Dakota State University.
"Old crop September corn futures have dropped $1.34 per bushel since late June and basis fell from $0.80 to $1.25 per bushel across the country," he said. "Similarly, old crop August soybean futures have fallen $1.86 per bushel since their recent high July 22 and basis decreased by around $1.30 per bushel."
Mark said both new crop corn and soybean futures have fallen over $1 per bushel, although new crop basis bids have remained relatively steady.
"These large price drops leave corn and soybean growers - particularly those that had made few pre-harvest sales yet - worried about how to market their crops now and manage their risk exposure," he said.
In light of new crop corn and soybean bids around $4.20 per bushel and $11.20 per bushel in eastern South Dakota, Mark said the guaranteed insurance prices for Revenue Protection (RP) polices look quite good now.
"The spring price for corn was $5.65 per bushel and the spring price for soybeans was $12.87 per bushel, while those prices are about $1.50 per bushel higher than current cash bids for new crop grain, it is important to remember that these prices are not guaranteed for every bushel produced on the farm - due to deductibles and actual production," he said.
For an example of the actual floor price established with an RP insurance policy, visit iGrow.org and search for Aug. 5 Cattle & Corn Comments.
"Marketing plans are not complete just because the crop is covered with RP insurance," Mark said. "RP crop insurance is, for many producers, an excellent part of a risk management plan. The RP policy that includes the harvest price option provides protection for producers forward contracting their bushels prior to harvest. Producers that took advantage of new crop forward contracts and priced a portion of their insured yields may have locked in a price around $1 per bushel higher than is currently available."
For pre-harvest sales not yet made and post-harvest marketing plans, Mark said few attractive alternatives exist for producers at this time.
"The current cash bid prices are likely near breakeven levels of production for some producers - particularly those who have aggressively bid up cash rent on farmland," he said.
Mark said a necessary first step is to calculate breakeven cost of production (in dollars per bushel) to gain perspective on whether current prices are profitable or not.
"Many producers may find that their yield prospects have improved from what they had budgeted at planting time; thus, the additional bushels would lower breakeven cost of production per bushel," he said. "As far as making additional sales, producers probably don't need to chase prices lower at this time. Instead, waiting for a potential pre-harvest rally and making an incremental sale should that occur would be prudent; otherwise, consider waiting until after harvest lows are established."
While the last couple of years have offered little incentive to store grain due to a flat or inverse carrying charge in the futures market, there is likely to be more opportunity to profit from storing the 2013 corn crop, and perhaps the soybean crop.
For corn, there is approximately a $0.28 per bushel carry between July 2014 and December 2013 corn futures. Mark said storing grain for eight months would provide a $0.035 per bushel return to storage.
"Even though that isn't likely to cover all costs of storage, an increase in the July/December spread could make this more attractive by harvest time," Mark said. "There is only a $0.22 per bushel spread between July 2014 and November 2013 soybean futures, so storage hedges are currently less attractive for soybeans for this length of time."
Mark added that producers should evaluate possible storage options for corn and soybeans, with intentions to update plans at harvest time.
"It is likely that many producers will place grain into storage this fall and will not begin to sell it in the cash market until 2014 to avoid additional grain sales in 2013, especially those who deferred 2012 crop insurance indemnity payments into 2013," he said. "Should that occur, basis improvement and a modest post-harvest rally could occur in November or December that would offer a more attractive sales opportunity at that time."