Urbana, Illinois
October 13, 2008
A recovery in corn and soybean
prices over the next six months is generally expected, making
ownership of the crops beyond harvest prudent, said a University of
Illinois Extension marketing specialist.
"The current price structure in the corn and soybean
markets suggests that holding physical inventory is the
preferred way of owning corn, while owning soybeans in the form
of a basis contract or futures contract may be cheaper than
physical storage," said Darrel Good.
Good's comments came as he reviewed the corn and soybean
markets.
Cash corn prices in many areas are at the lowest level since
October 2007 and cash soybean prices are at the lowest level
since August 2007.
"While still high by historic standards, current prices are low
in relation to the much higher costs of production experienced
in 2008 and anticipated for 2009," Good noted.
Prices have been pressured by a number of factors, he added.
Since he noted these factors two weeks ago, there have been
further declines in crude oil, gasoline, and ethanol
prices--keeping pressure on corn prices.
"In addition, concerns about economic recession have deepened,
pointing to continued demand weakness," he said.
The pace of corn export sales remains in line with the USDA's
projection of total exports for the current marketing year,
while soybean export sales remain robust.
"However, the slowdown in the domestic crush of soybeans which
began in June continued through September," he said. "The Census
Bureau reported that the domestic crush totaled 125.7 million
bushels in September 2008, 15 percent smaller than the crush
during September 2007. That is the third smallest September
crush in 10 years and represents the first year-over-year
decline in the September crush in four years.
"The USDA is currently projecting a 2.3 percent decline in the
crush for the current marketing year. The crush during the
October 2008 through August 2009 period will have to be only 1.1
percent smaller than during the previous year to reach that
projection."
Good noted that while the demand side of the equation will
continue to dominate price behavior, the USDA's November
production forecasts could also be important.
"The late maturity of both the corn and soybean crops provided
less data for the USDA's October objective yield forecasts than
in most years," he said. "This suggests that the November
forecast could deviate by a larger-than-normal amount from the
October forecast.
"Anecdotal yield reports suggest that the November forecast
could exceed the October forecast for both crops."
One encouraging development during the recent decline in price
levels has been the general strengthening of the basis. In
central Illinois, for example, the average cash price of corn on
Oct. 24 was about 40 cents under December 2008 futures. The
basis is about 20 cents stronger than reflected by harvest
delivery bids in late summer 2008, but still about 20 cents
weaker than at this time last year.
On the same date, the average cash price of soybeans in central
Illinois was about 30 cents under November 2008 futures. The
basis was about 60 cents stronger than reflected in harvest
delivery bids in late summer 2008 and about 15 cents stronger
than at this time last year. Importantly, the soybean basis at
the futures delivery market is approaching normal levels,
continuing the improved convergence experienced in July and
August.
"In addition to the strengthening basis, the spreads in the
soybean futures market have narrowed substantially over the past
month," Good observed. "In early October, for example, July 2009
soybean futures were priced about 54 cents above November 2008
futures. That spread at the close on Oct. 24 was only 27-3/4
cents.
"The combination of a strong basis and small 'carry' in the
futures market results in a very small return to storage of
soybeans. Even if summer 2009 basis levels returned to very
strong minus-10 cents in central Illinois, the market is only
offering about 50 cents return to store the crop for eight
months."
Interest costs on $8.30 soybeans for eight months at 6 percent
interest would total about 33 cents, leaving only 17 cents to
cover storage costs, he pointed out. If the summer 2009 basis is
near the 2008 level of minus-30 cents, the market is offering a
negative return to storage.
"In contrast, the December 2008 to July 2009 spread in the corn
futures market stood at 37 cents on Oct. 24, so that the spot
cash price of corn was 77 cents under July 2009 futures," he
said. "If summer 2009 basis returns to the minus-15 cents level
generally experienced prior to 2008, the market is offering a 62
cents return for corn stored for eight months.
"Interest costs of about 13 cents per bushel would leave a
return of 49 cents per bushel for storage. That return exceeds
commercial storage costs in many areas."
By Bob Sampson, University of
Illinois |
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