Record size crops of corn and soybeans and substantially lower prices in combination with high costs have col-lapsed crop margins. The USDA expects corn prices to average $3.50 per bushel for the 2014 crop, nearly $1 lower than last year’s crop. Soybeans are expected to be $3 a bushel lower at $10 per bushel.

Lower prices are a result of world inventories for both crops increasing over the last three years as world production has exceeded world consumption. World corn inventories are now at the highest level since 2002 and soybean inventories are expected to be at record high levels after the huge South American crop is harvested this coming spring.

Prices of corn and soybeans reached their fall lows in early October and then had a strong rally. Corn futures prices are expected to trade in the $3.70 to $4.30 range this winter. Feed use will build in the second-half of
the marketing year as animal numbers rise. Continued growth in animal numbers will provide a more substantial base for feed needs in the 2015 crop marketing year. Ethanol production has started the marketing year with a bang using about 3% more corn that at the same time last year. However, low crude oil prices are expected to weaken demand for E85 domestically and for ethanol exports, and thus corn use for ethanol may only be about 1% higher for this year’s crop. Corn export commitments are still running about 8% behind last year’s export pace as the strong dollar and competitive supplies of corn and feed wheat are hurting U.S. sales.

Corn usage will grow over time, and current budgets suggest that farmers will plant 2% to 3% less corn acre-age next year. This smaller acreage and yields that move downward closer to normal would be the fundamentals that suggest higher corn prices for the 2015 crop. Given normal yields next year, a return of the U.S. average corn price close to $4.00 a bushel seems likely.

While no one can accurately foretell prices in coming years, some Ag economists as well as futures markets have been suggesting prices might average $4.00 to $4.25 over the years of the farm bill which covers the 2014 through 2018 crops. This would be in contrast to$5.69 a bushel for the previous four marketing year’s that covered the 2010 to 2013 crops. If so, margins will be tight and some cost items will likely have to adjust down-ward as well.

Soybean fundamentals have some potentially bearish components over coming months. First, shortages of soy-bean meal helped bean prices recover this fall. Delayed harvest and tight farmer holding made it difficult for crushers to get up to full processing capacity. However, that meal shortage should soon be relieved. China was a large buyer of beans in October and seemingly was able to turn the market upward. However, they will soon begin to shift their purchases toward South America.

USDA is expecting a nearly 6% larger crop in South America and if that develops it will push world inventories to record high levels this winter/spring. South America has risen to produce 52% of all the world’s beans this marketing year. U.S. production now represents just 34% of world production, and U.S. farmers are expected to increase soybean acres by about 3% next spring. These supply forces may provide incentives for lower soybean prices this winter and spring.

Bean futures may first retest the $11 area this winter and those could be good pricing opportunities. Since South America is becoming so dominant in world production, most U.S. farmers will want to retain some ownership of soybeans into the winter in case weather becomes unfavorable to yields in South America. Weather issues there could carry soybean futures back up to $12 to $12.50 if they are severe enough. However, the odds of prices mov-ing that high are reasonably small, but always a possibility at this time of year.

Prices of soybeans for the 2015 crop could fall toward the $9.00 to $9.50 level if both South America and the U.S. have near normal yields. Pricing of 2015 soybeans should be considered with November 2015 futures in the $10.50 to $11.00 range (or higher).

Grain margins are expected to be narrow for several years. Current futures markets for the 2015 to 2017 crop years are suggesting U.S. price averages around $4.00 to $4.25 for corn and around $10 for soybeans. These prices would be below total costs of production for many farms and mean tight margins. Grain producers should consider strategies that will enable them to adjust to a tight mar-gin period including the possibility that some costs items will decrease in the next few years.