Delton Gerloff
May 9, 2008
Grain and cotton prices rose this week and the USDA released its first supply/demand projection for the 2008/09 marketing year. The projection indicated much lower U.S. corn and cotton stocks.
Corn:
Short Run: Cash corn prices ranged from $5.78 to $6.09 across Tennessee Thursday. The May futures price closed at $6.1875 Thursday, over 13 cents higher than the previous Thursday’s close. USDA released its first 2008 crop year projection Friday, with production expected to drop by nearly a billion bushels in the U.S. compared to last year. Corn planting still lags well behind average for this date, adding to the uncertainty in this year’s crop projections.
Long Run: Harvest 2008 cash contract prices across Tennessee ranged from $5.49 to $6.07 Thursday. The December 2008 futures contract closed Thursday at $6.4625, almost 15 cents higher than the previous Thursday’s close. According to Friday’s USDA projection, corn feed use and exports will drop significantly, but ethanol processing will increase enough to make up for most of the drop. The first ending stock projection for the 2008/09 marketing year came in at 763 million bushels. That level is enough to keep the markets nervous and volatile until this year’s crop is further along in the production year. Consider having up to 40% of expected production priced on the current market, using cash forward contracting. The basis remains wide between cash contract and futures prices, but pricing a portion now can help reduce the financial risk associated with this year’s crop.
Cotton:
Short Run: The July futures contract closed Thursday at 70.85 cents/lb, 1.60 cents higher than the previous Thursday’s close. Friday’s USDA report added another 200,000 bales to old crop stocks, as both domestic and export use dropped. This latest stock number will make it more difficult for old crop stock prices to rally substantially.
Long Run: The December 2008 futures contract closed Thursday at 79.35 cents/lb, 1.90 cents higher than the previous Thursday’s close. USDA’s first projection for the 2008/09 marketing year put U.S. ending stocks at 5.6 million bales, over 4 million below the level expected this year. The 5.6 million bale level is not a low stock level historically, but indicates more of a directional change in the recent U.S. stock buildup. Total 2008 production is estimated to be 14.5 million bales in the U.S., with total use estimated to be 18.8 million bales. That shortfall can be taken out of carryover stocks this year, but would likely mean increasing acres in the 2009 crop to meet demand. Exports are the key - if they can remain 14 million-plus, I think prices will move higher later this year. For now, consider pricing up to 25% of expected 2008 production using options.
Soybeans:
Short Run: Cash soybean prices ranged from $12.15 to $12.66 across Tennessee Thursday. The May 2008 futures contract closed Thursday at $12.9825, 39.5 cents higher than the previous Thursday’s close. Friday’s USDA report dropped old crop stocks levels again on the basis of strong exports. Prices moved higher Friday, with futures prices nearing $13/bu.
Long Run: The November 2008 futures price closed Thursday at $12.4575, 52.5 cents higher than the previous Thursday’s close. Cash forward contracts for harvest ranged from $11.25 to $11.72 across Tennessee Thursday. USDA’s first projection for the 2008/09 marketing year put ending stocks at 185 million bushels. I think many analysts were expecting a larger stock estimate, and prices rose 50 cents/bu on the futures market. A strong export market projection of over 1 billion bushels given the current price helped to keep the stock level under 200 million bushels. A stock projection that low this early in the production year just adds to the current market uncertainty. Consider having up to 40% of this year’s expected production priced using cash forward contracting or options.
Wheat:
Short Run: The May futures contract closed at $8.09 Thursday, 32.5 cents higher than the previous Thursday’s close. USDA’s first new crop report projected new crop ending stocks to be 483 million bushels, an increase of 244 million bushels over old crop stocks. I think that increase will push prices lower if the production projection materializes this year.
Long Run: Cash contract prices for July 2008 ranged from $5.22 to $6.70 across Tennessee Thursday. The July 2008 futures contract closed Thursday at $8.22, 32 cents higher than the previous Thursday’s close. The disconnect between futures and cash markets continued as some locations reported a cash contract price for July $3.00/bushel below the July futures price. One way to manage price risk this year would be to cash forward contract a portion of expected production now and sell the rest at harvest or store in on farm storage.
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