Producers now find themselves holding a lot of unpriced inventory on the farm and in commercial storage. "When grain is in the bin, elevator managers advise farmers to store for basis gain and carry but not flat price," says Farm Journal Economist Bob Utterback. "Producers, on the other hand, look at stored corn as a flat price play, meaning prices are ‘too’ low."
Once the corn is in the bin, the market does not care what it took to produce it; instead, the market is only concerned about arriving at a price based on the current and expected supply-and-demand relationship, Utterback cautions. This is where producers get tripped up. Between now and July, he sees the following scenario playing out:
- Basis could peak in December, so dump inventory for January or February delivery. Toward the end of December, basis will start to stall.
- Expect cash flow pressure in January and February as necessary cash sales are made. However, farmers will continue to hold tight because of a low flat price.
- A significantly higher portion of grain inventory will be stored unpriced into May and through July in the hope of catching a major weather yield-reduction event. This will lead to an "all or nothing" situation in July. Prices will either be on fire because of yield reduction concerns on lower planted acres, or frozen because the prospective planted acres will not fall much below 94 million and trend-line yields will move back to 164 bu. per acre—resulting in a carryover situation close to 2.5 billion. The latter example could lead to historically wide basis going into the summer of 2014 and a flat price that is well below the cost of production—a truly precarious situation for grain farmers.
For now, supply is growing and demand is stable. "Be realistic with 2014 pricing," Utterback encourages. "I would rather lock up a moderate profit for 2014 than take the risk of being forced to sell way below your cost of production if carryover mushrooms because of trend-line yields. If you want to assume a speculative position, buy back on paper below $4.20 in March futures or add value by selling $4 or lower puts."
For More Information
Read Utterback's Outlook Today blog.
See current market quotes with AgWeb's Market Center.
This is one of the 14 Drivers for Success in 2014. Read the full list from Farm Journal's December issue.