October 18, 1999
CROP PRICES CONTINUE TO STRUGGLE
The prices of corn, soybeans, and
wheat remain at historically low levels and well below the Commodity
Credit Corporation (CCC) loan rates. Basis is weak for all three
commodities. While cash prices are not expected to decline much
further, reasons for a significant recovery in prices also remain
The recent rally in the prices of
crude oil, gold, and coffee have triggered hopes for a recovery
in the price of other commodities, including grains and oilseeds.
The rally in the price of gold and crude oil, however, were triggered
by agreements of market participants to restrict supply. Higher
coffee prices were the result of concerns that dry weather would
negatively impact Brazilian production. Grain and oilseed prices
need a solid fundamental reason of their own to move higher.
There are some positive developments
for crop prices. World wheat consumption is expected to exceed
production for the second straight year, resulting in a further
decline in year ending stocks. World coarse grain and soybean
stocks are expected to decline modestly by year end. Domestically,
improving livestock price prospects, along with a steady number
of grain consuming animal units, bodes will for feed demand. Significantly
higher prices, however, may require reduced supplies.
The USDAs November Crop
Production report is not likely to show smaller U.S. corn
and soybean crops. Odds actually favor a slightly higher estimate
of the corn crop. Near term chances for a reduction in supply
are associated with southern hemisphere crops. Currently USDA
estimates are for larger coarse grain and wheat crops and only
a modest cut in soybean production in the southern hemisphere.
There is some concern about dry conditions in Brazil, although
it is early in the planting season. Weather conditions there will
certainly be important over the next 4 months and could provide
some legitimate supply concerns. Longer term, production prospects
for the 2000 crops in the northern hemisphere, particularly in
the U.S., will be important. A reduction in acreage will not occur,
so that yield prospects will be important. Average yields have
been generally good for four consecutive years.
History clearly indicates that a
period of higher crop prices will eventually emerge. There is
not a good way to predict when that will happen. With prices at
such low levels, however, marketing strategies this year should
include some provision to take advantage of such an event. The
most straightforward way to do that is to store some of the crop
unpriced, with the protection of the marketing loan. As pointed
out last week, a well rounded marketing strategy might also include
pricing some of the crop for later delivery, to capture the large
premiums, while establishing the loan deficiency payment (LDP)
now. As harvest reaches completion, some consideration might be
given to establishing the LDP on a small portion of the crop and
storing the crop unpriced.
In the meantime, there appears to
be some additional income relief on the way. The agricultural
appropriations bill includes funds for disaster aid and crop insurance
subsidies. The legislation also includes provisions for a doubling
of the production flexibility contract payments for the 1999 crop.
Those payments are based on base production levels. Last year,
those rates were increased by about 50 percent and designated
as marketing loss assistance payments. The payments, for program
bushels, for the 1999 crop are $.637 for wheat and $.363 for corn.
In addition, the legislation also designates $475 million for
assistance to oilseed producers. The funds would be allocated
on the basis of actual production. In the October Crop Production
report, the USDA estimated 1999 U.S. oilseed production at
83.75 million tons. The allocation of $475 million would represent
a payment of $5.67 per metric ton, or about $.15 per bushel for
soybeans. Finally, the legislation doubles the payment limitation
for marketing loan gains or loan deficiency payments to $150,000.
It is believed that the President will sign the legislation.
The combination of loan deficiency
payments (or marketing loan gains), production flexibility contact
payments, oilseed payments, and large carry in the market offer
a reasonable net price for producers with average or above average
yields in 1999.
Issued by Darrel
University of Illinois