March 1, 1999
CORN AND SOYBEAN PRICES
NEARING A LOW
March 1999 soybean
futures declined nearly $.60 during the month of February and
about $.94 since the first of the year. Cash prices in central
Illinois declined a similar amount, ending the month at just under
$4.40 per bushel. March corn futures declined about $.11 during
the month, with cash prices declining about $.14, as the basis
weakened during the month. Cash prices dropped under $2.00, returning
to near the loan rate. The reasons for the price declines have
been well documented.
With prices now at extremely low
levels and large speculators already holding large short positions,
there is growing expectation that prices have neared a low for
the time being. Technically, soybean prices should find some support
near the 1976 lows. In addition, prices below the loan rate will
keep farmer selling of soybeans at a slow pace. The same will
likely be true of corn, as prices have retreated to the loan rate.
Finally, there may be a reluctance to push prices any lower in
front of the March 31 Prospective Plantings report and
the beginning of the planting season.
While a low may be forming, expectations
for any significant price recovery are not widespread. The generally
slow pace of consumption and expectations of larger year ending
stocks of soybeans are major hurdles to overcome. In addition,
there is a large inventory of soybeans for which farmers have
already established the loan deficiency payment (LDP) but have
not established a price. As a result, the current price represents
a net price below the loan rate for those soybeans. Any rally
in prices will likely be met with widespread selling of soybeans.
For corn, producers will likely be anxious to sell additional
quantities on rallies prior to the planting season. Many may prefer
to own corn with call options rather than in inventory, now that
option premiums have declined.
New crop prices have not been under
as much pressure as old crop prices. November 1999 soybean futures
declined about $.42 in February and $.79 since the first of the
year. December 1999 corn futures declined $.06 in February and
$.07 since the first of the year. As a result, prices for the
new crop are substantially higher than old crop prices. March
2000 corn futures on February 26 were $.365 (18 percent) higher
than March 1999 futures. March 2000 soybean futures were $.52
(12 percent) higher than March 1999 futures.
The large spread reflected the expectations
of large year-ending stocks that will have to be carried into
the next marketing year. To some extent, the market has to pay
someone to carry those inventories. The larger spread in corn
also reflected the expectation of a decline in corn acreage in
1999 and some possibility of a reduction in inventories next year.
For central Illinois locations, the market is offering an average
corn price for the 1999-2000 marketing year of about $2.25 to
$2.30 per bushel, assuming normal basis levels. The soybean market
was offering a seasons average price of about $4.85 per
For soybeans, the new crop price
is well below the expected loan rate for the 1999 crop. Even so,
prices by late summer or early fall could be lower if another
large harvest is on tap. Some are inclined to forward price new
crop soybeans, anticipating lower prices and a large loan deficiency
payment at harvest. There is obvious risk to that strategy if
a crop problem develops this summer. With so much time left to
market the 1999 crop, it is a risk that probably does not need
to be taken on a large part of the crop. The reverse strategy,
establishing the LDP and holding unpriced soybeans, has not worked
well for the 1998 crop.
For corn, the new crop price is
well above the expected loan rate for the 1999 crop. Without a
growing season weather problem, prices could decline below the
loan rate by harvest, particularly if the decline in corn acreage
is less than some of the inflated numbers currently being discussed.
At the same time, corn is probably more vulnerable to a weather
problem than soybeans. Forward pricing some new crop corn might
be considered. If a large percentage of the crop is priced, some
protection with call options would be prudent.
Issued by Darrel
University of Illinois