While weather will have a lot to do with how much gets planted and market behavior over the next month or so, the potential for lower corn and soybean prices at harvest this coming fall suggests farmers take advantage of price rallies this spring to protect against downside risk. "Domestic demand and exports have stayed strong, and both corn and soybean prices are holding at surprisingly strong levels," points out Steve Johnson, an Iowa State University Extension farm management specialist. "Prices this spring are offering farmers a good opportunity to lock in profits on part of the crop they plan to harvest in 2014."
He's encouraging farmers to look at doing some preharvest marketing to generate cash to offset some of the expenses they will have next fall and winter. While crop planting this spring is getting off to a slow start, history has shown that fields planted later than normal can still produce outstanding yields. Much will depend on spring and summer weather across the Corn Belt.
After USDA released its Prospective Plantings report for 2014 on March 31, crop prices moved to a higher level, one that most market analysts did not expect to see. The rally has provided a profit opportunity this spring for forward pricing. After last fall's bigger than expected harvests, many analysts thought crop prices would stay at or below cost of production throughout 2014. ISU economists estimate the breakeven cost at $4.29 per bushel for a typical Iowa corn grower and $11.13 per bushel for soybeans.
Tighter-than-expected stocks heighten focus on 2014 crop
As of this week (week ending April 18), new-crop December corn futures contracts have been trading around $5 per bushel and new-crop November soybeans above $12.25 per bushel. While cost of production and basis levels (difference between futures prices and local cash bids) vary considerably from farmer-to-farmer and location-to-location, most Iowa farmers have had an opportunity this spring to lock in a profit with pre-harvest sales, notes Johnson.
Tighter-than-expected grain supplies showed up in USDA's recent quarterly grain stocks report. That is putting more focus on 2014 acreage and yield prospects. "It's been the surprising strength in demand, both U.S. use and exports of corn and soybeans, that has rallied crop prices higher this spring," says Chad Hart, ISU Extension grain marketing specialist. "Demand has really rebounded and that has surprised us."
Weather uncertainty also a concern for new crop
Continued dry weather in the western Corn Belt and Great Plains are another factor that's been supporting crop prices, says Hart. While USDA's 2014 prospective planting survey shows farmers are planning to plant a big crop, the market is concerned yields may suffer if dry conditions persist in Iowa, Nebraska and other states. Also, Kansas, Oklahoma and Texas have been quite dry, reducing wheat crop prospects. As a result there could be less wheat competing with corn in cattle feeding areas beginning this fall.
"It's not unusual to see weather build a premium into corn and soybean futures prices in the spring each year," says Johnson. Crop prospects are still uncertain. Looking at historical price trends, year in and year out the strongest futures markets tend to be in March through June. "Thus, we suggest farmers consider forward pricing some of their 2014 bushels to cover production costs. It makes sense to take advantage of these stronger than expected prices while they're available. There's no guarantee corn and beans will stay at profitable price levels as we move further into the growing season."
Use revenue protection with preharvest marketing
Many farmers are reluctant to forward price bushels that haven't yet been planted or harvested. "But the revenue protection crop insurance that most farmers use today protects farmers who market unharvested bushels early," says Johnson.
The farmer is guaranteed bushels by taking their Actual Production History, or APH, times the level of coverage they elect each year. Also, they're guaranteed revenue using the projected price. That's the February average for December 2014 corn futures which was set in February at $4.62 per bushel. The February average for November 2014 soybean futures price was set at $11.36 per bushel. "When we're above these projected prices, sell some of your new crop bushels," Johnson advises.
FINAL THOUGHT: Looking ahead, one factor that could affect growing conditions this summer is El Niño. During the growing season, the occurrence of El Niño and its associated weather pattern often means wetter and cooler conditions in the Corn Belt, says ISU Extension climatologist Elwynn Taylor. That's favorable for producing crops. The most recent indicators show the odds of El Niño developing this summer or fall are now over 50%. The question is whether the El Nino weather pattern would come soon enough to help boost corn and soybean yields during the 2014 growing season.