Grain Prices Remain Depressed

Two years of high U.S. yields for both corn and soybeans have contributed to low grain prices that are below total costs of production for many producers. More importantly, world annual corn and soybean production has exceeded annual consumption for the past four years. As a result, world inventories have been growing such that world corn and world wheat inventories are expected to be at the highest level of the past 14 years. World soybean inventories are near the highest levels of the past 15 years. 

In addition, the strength of the U.S. dollar is weakening grain and soybean price prospects. There are two ways the strong dollar is weakening U.S. grain prices. First, a strong dollar means that the currencies of our foreign buyers are weak and have reduced buying power for U.S. farm products. China’s currency has lost 4% of its buying power in the U.S. over the past year. More dramatically, Japan’s buying power has dropped 12% and the Korean currency has dropped 15% in the past year. Secondly, the currencies of our export competitors are weak and this makes their corn, soybeans, and wheat more price competitive. As an example, the Brazilian currency has dropped 40% relative to the U.S. dollar in the past year and this makes their soybeans and corn much more price competitive compared to U.S. origin bushels. 

Odds favor a sidewise price pattern into the winter or at least until some event changes the overall excess supply situation. However, the price pattern and marketing strategies vary for corn and soybeans. 

Corn prices are expected to increase in the winter and next spring by at least enough to cover on-farm storage costs. Eastern Corn Belt basis levels are expected to remain very strong especially in Indiana where low yields were dominant in the northern 2/3rds of the state. Cash prices are expected to be in the higher $3’s or lower $4 range this winter. Spring and summer highs could then move to the very low $4 to maybe around $4.40 at ethanol plants. Farmer holding is expected to remain tight until cash prices reach, or exceed the $4.00 per bushel mark. 

Current corn bids suggest that the gain in price to next spring and early summer will be more than on-farm storage costs. This signal favors continued storage. When one decides to price, they should probably price for next summer delivery. The principal is to price for the delivery period that provides the most return above storage costs. This is called earning the carry in the market and is generally one of the best marketing strategies in periods of excess supplies. 

Soybean price bids do not show much gain into next spring and summer. Current forward bids for winter or spring do not cover the added on-farm storage costs to store that long. Cash bids in the Eastern Corn Belt are expected to be in the very high $8’s to about $9.40 this winter. Then prices are expected to weaken in the late winter and spring, assuming South America has average or better yields. So, soybean price premiums for storage into late winter and spring are generally not enough to cover interest costs of on-farm storage. Strategies that tend to work well in markets where there are small price premiums for later delivery are to sell the cash grain now or at least into the early winter. Also, selling the soybeans now, or into January, and then re-owning those bushels in the futures market or with call options tend to be good strategies. The simplest strategy is to just hold beans in storage in anticipation of some price recovery. That works well for short term storage into this winter. 

Weather in South America can affect prices this winter and depending on the nature of that weather can increase or decrease U.S. prices. The biggest impact would generally be on soybean prices, with corn moving in the same direction, but with a smaller magnitude of price change as compared to soybeans. 

Current economic indicators favor less U.S. corn and wheat acreage in 2016 and more soybean acres. The reduction of corn acres is expected to increase 2016 corn prices by about 20 cents a bushel over 2015 crop prices. However, expected government payments for the 2016 crop will be lower. If so, this means that total revenues from the 2016 corn crop will be similar to the 2015 crop, and thus the best way to narrow the negative margins is to strive to drive costs lower. 

Greater soybean acreage in 2016 may keep soybean prices depressed, maybe at levels that are not much different from for the 2015 crop. Soybean prices are thus also expected to stay below total production costs for the 2016 crop as well. 

The current negative crop margin period is expected to last several years. Producer strategies in these tight margin periods include watching closely for any price rally to sell more bushels. The current tight storing pattern suggest many producers are doing this. Secondly, striving to drive costs per bushel downward is always an important strategy. Generally, costs adjustments take time and producers should prepare for tight margins at least through the 2018 crop. Hopefully some progress will be made each year in narrowing the current negative margins. By late this decade, producers will have adjusted their costs to be in better alignment with revenues. If so, U.S. agriculture will have worked through a cycle of boom, and then moderation, spanning from 2006 to 2020.