NOTE: Steve Johnson is the Iowa State University Extension farm management specialist in central Iowa.
Iowa farmers harvested record corn and soybean crops this fall. Much of that grain now in storage, both on-farm and in commercial storage, is unpriced. In 2010, 2011 and 2012, when corn and soybean prices were at the highest levels in history, farmers got used to not having to do preharvest marketing of their grain. Those farmers who moved away from managing futures price risk are paying the price. Way too many bushels are now in storage, unpriced and typically without a marketing plan.
Hedging, selling futures or buying put options could have provided some price protection prior to the late summer and fall futures price collapse. Now the challenge is going to be managing both the basis as well as the futures price— f you haven't already taken such action.
How huge are this year's corn and soybean crops?
Iowa's 2015 corn production is forecast at 2.49 billion bushels, 5% above the 2014 production and 3% above the October forecast, according to the latest USDA National Agricultural Statistics Service – Crop Production report. If realized, Iowa's production this year will be a record high, topping the previous record set in 2009 by 4%.
USDA's November crop production estimate, released November 10, is based on conditions as of November 1, and Iowa's corn yield is expected to average 189 bushels per acre, 11 bushels above last year and 6 bushels per acre above the October forecast. If realized, the yield will also establish a new record high, exceeding the previous record of 181 bushels per acre set in 2004 and tied in 2009. Acres harvested for grain in Iowa in 2015 remain unchanged from the October estimate, at 13.2 million acres.
Yield forecasts for Iowa's nine Crop Reporting Districts reflect just how large both corn and soybean yields are statewide. Final county yields will not be available from USDA until mid-February.
Source: USDA NASS, Nov. 10, 2015
Soybean production is also a record
Iowa's soybean production is forecast at 550 million bushels, up 10% from 2014 and 6% above the October forecast. If realized, this will be the highest soybean production on record for Iowa, 5% above the 525 million bushels produced in 2005. The November forecast puts the state yield average at 56 bushels per acre, 5 bushels above 2014 and 3 bushels above the October forecast. If realized this will be the highest Iowa soybean yield on record, 3.5 bushels above 2005. Area harvested in 2015 remained unchanged from the October estimate, at 9.82 million acres.
Grain storage versus marketing tools
Iowa farmers are holding most of the 2015 crop in storage unpriced. A study compiled annually by Bryce Knorr and featured in the September 2015 issue of Farm Futures magazine compares storage to a variety of marketing tools each year since 1985 at nine different Corn Belt Terminal elevators.
The data for both corn and soybeans at a north-central Iowa terminal elevator from 1990 to 2014 was used to determine the net profit/loss per bushel. Annually, the cash price at harvest is compared to on-farm and commercial storage against four other marketing strategies and tools over an 8½ month period (October to late June).
Source: Knorr, Farm Futures Magazine, Sept. 2015
On this bar graph, note that soybeans (darker color bar) appear to have much larger returns than corn (lighter color bar) on average for all marketing tools excluding the storage hedge. This might be true on a per bushel basis, but remember the volume of corn typically harvested per acre would be roughly three to four times larger than that of comparable soybeans. So a net return for storage and marketing might not be that much different on a per acre basis.
Storing either corn or soybeans, requires that you annually consider your cash flow needs, futures market carry, supply/demand as well as local basis opportunities. Cash bids at an elevator or co-op are likely lower than a nearby processor or terminal bid.
Is storage the best strategy?
Storing corn on-farm for 8½ months unpriced provided a positive return over the harvest cash price, on average 26 cents per bushel. The return for storing soybeans on-farm unpriced until July 1 averaged 87 cents per bushel. Don't construe these strategies as risk free or July 1 as a magic date to price bushels, as these are the simple averages during that 25-year period.
Storing those bushels in commercial storage for 8½ months unpriced provided an average return of 8 cents per bushel for corn and 65 cents per bushel for soybeans. Thus, on-farm storage always had a higher net profit per bushel over commercial storage.
Consider the other marketing tools
Note that the other four marketing strategies and tools for corn provide nearly the same or a greater return than does commercial storage. Thus, storage is an important consideration in reviewing the study. Also, the ability to capture a better basis post-harvest by using on-farm storage with a variety of local cash bids should be an important consideration.
The study reflects that other marketing tools for corn have slightly larger average returns compared to commercial storage unpriced until July 1. These include a storage hedge, or store and buy a July put option, or use a basis contract. The storage hedge typically works because there is usually a carry in the corn futures market from December compared to July. A minimum price contract warrants consideration as seasonally, July corn futures prices tend to move higher in the spring months. So selling cash bushels and replacing those bushels with a July corn call option or a long July corn futures (basis contract) should be considered.
For soybeans, other than the storage hedge that netted on average of 5 cents per bushel loss, several tools are very competitive with storage. Remember, during the 25-year period of this study (1990-2014), large growth in South American soybean production took place. Thus, swings in the soybean futures prices are reflected and allowed for a better net gain than corn on a per bushel basis. The fact that soybean futures prices tend to rally in the spring and early summer months can serve as a crutch for not considering strategies other than storage.
Note especially, the use of a basis contract (sell cash, buy July futures) for soybeans averaged 88 cents per bushel net return as compared to the harvest cash price. This was even slightly greater than the strategy for on-farm storage unpriced for eight months.
Conclusion: the trends remain the same for corn and soybeans
When reviewing this same study over 10-years (2005-2014), the returns are larger per bushel, as the futures and cash prices were higher. However the trends of the 25-year period (1990-2014) remain the same for both corn and soybeans.
A variety of marketing tools are available through your local grain merchandiser when you provide bushels committed to delivery. Examples are typically referred to as a minimum price contract or a basis contract. With large U.S. ending stocks building with the 2015 crops, consider using more than just on-farm and commercial storage strategies with bushels unpriced.
For farm management information and analysis visit ISU's Ag Decision Maker site at extension.iastate.edu/agdm; ISU farm management specialist Steve Johnson's site is at extension.iastate.edu/polk/farm-management.