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Power Hour: Making the Case for Corn Price Averaging

May 10, 2013
By: Ed Clark, Top Producer Business and Issues Editor

 For new crop corn, it could be such a wild and volatile year that price averaging offers great appeal. "I can still tell you a good $4 or $9 new crop corn pricing story," says Chad Hart, Iowa State University ag economist. If it’s a big crop, harvest prices could be in the upper $3 to lower $4 levels. If it’s a short crop, prices could exceed $8. Because of that, he thinks pricing throughout the marketing season makes sense.

"Don’t get caught up trying to make the big sale," he advises. However, selling a portion today is not a bad beginning point for those who have not forward priced any new crop, with futures at about $5.30. He acknowledges that $5 corn might not sound all that enticing with old crop near $7. "But not often do you look at the potential of 97 million acres and a $5 price," Hart says. Current levels are profitable, he adds.
Still, Hart doesn’t rule out rallies throughout the growing season. "Even though we’ve had good rain and snow doesn’t mean we couldn’t have moisture problems later on." Despite the delayed planting season, he thinks it’s too early to discount yields just yet. "For Iowa, the corn crop can still achieve 95% of its yield potential if planted by mid-May." Consider the 1983/84 pattern. "We suffered through the drought of 1983, got off to a late start in 1984, but still achieved a trend-line corn yield."
Hart also thinks that put options for a portion of 2013 production at present price levels makes economic sense. Still, with crop insurance providing good protection again this year, there is no need to rush to make your marketing decisions, he says. "For those who haven’t forward priced, it looks like you still have some time to do so."
"On old crop corn, I see some potential for upward price movement," Hart says. Because an uptick could be relatively short lived, he advises holding out no longer than about eight weeks, late summer. For producers waiting to sell, he advises taking advantage of strong basis with basis contracts. August corn basis in Iowa is near record high levels, about a positive $1.20.
While supply issues have dominated much of recent market discussion, demand may be quietly rebuilding. Lower new crop prices have been enticing enough to stimulate some advance export sales. Ethanol demand had dropped from 95 million bushels of corn per week pre-drought to 85 million during and after the drought. In recent weeks, the ethanol industry has reached back up to 90 million bushels as ethanol plants come back on line, Hart notes.
"On old crop soybeans, however, I’m not sitting on it," Hart says. Reason why: South American production is entering the pipeline. "Brazil ports have really opened up." For new crop soybeans, Hart sees the possibly of a rally, but not until late summer.

 

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