Record corn crop poses questions about profits

by Laura Lloyd
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KANSAS CITY — As corn futures prices sink to multi-year lows, the cash basis for corn continues to erode and any upside price potential seems like a distant dream, some farmers are looking at their expected harvest bounty and seeing a disappointing year.

Even the prospect of a record U.S. average yield of more than 171 bus an acre only goes so far to make up for the low — and trending lower — prices per bushel, the pessimists contend. Ethanol production appears to have leveled off even though demand will remain strong because of good profit markets for ethanol producers, and export demand remains a question given ample global corn supplies and China’s recent rejection of U.S. corn products because of unapproved bioengineered traits.

About the only hope for higher prices until harvest is finished in late October is if speculators decide they see profit opportunities in technically oriented trading as corn prices continue to test new lows.

“We will get to a point where this begins to happen,” said Karl Setzer, market analyst with MaxYield Cooperative in West Bend, Iowa.

So say the naysayers — and there are plenty of them. They look at the current corn prices in the country below $3 a bu and futures below $3.50 a bu, as well as the specter of higher costs such as transportation, and even the U.S. Department of Agriculture’s forecast of almost 12 bus an acre more yield in 2014 than 2013 provides little comfort. They look back to last fall, when December futures were more than a dollar higher in early September 2013, compared with current price levels.  The cash price in the country was higher as well, although difficult to pin down because of variations at different locations. By some calculations, last year’s revenue per acre at harvest may have been higher on average than what is expected this year.

But many market analysts see a more complex picture: perhaps smaller profits than last year but profits nonetheless. And there will likely be more variability in financial results than in past years, depending on actions producers may have taken earlier in the growing season.

“Saying this is going to be a bad year for everybody is wrong,” Mr. Setzer said. “Revenues per acre are going to be different from field to field depending on the cost of production.”

Marty Foreman, senior economist at Doane Advisory Services in St. Louis, noted that farmers sold some of their huge crop at higher prices well before harvest. While statistics on how much was sold are not readily available, analysts assume between 25% and 30% of the crop was sold. He also said the U.S.D.A. may increase its yield-per-acre estimate in October to about 173.7 bus from the current 171.7 bus. And yields in many areas are far exceeding the national average. Those additional bushels could make a declining basis less devastating. He also said producers came into 2014 in generally good financial shape.

“Some people have a pretty good war chest,” Mr. Foreman said.

But he acknowledged there were complications in the picture of how profitable this year’s corn crop is likely to be, and he said the drama of this year’s corn crop will play itself out in the cash basis levels at different locations through the Corn Belt.

“There will be a widening of the basis” reflecting pressure near the completion of harvest in the second half of October when cash prices likely will be at their lowest, Mr. Foreman said.

On top of the expected crop of 14,395 million bus forecast by the U.S.D.A. in its September Crop Production report, there was carryover on Sept. 1 from the 2013 crop of 1,181 million bus estimated in the September World Agricultural Supply and Demand Estimates report. The U.S.D.A. will issue a revised Sept. 1 corn stocks estimate in its Grain Stocks report on Sept. 30.

“There will be a strain on storage that will likely have a negative effect on the basis,” Mr. Foreman said.

Nonetheless, storing as much new-crop corn on the farm as possible and waiting for higher prices is the typical approach recommended to producers looking to enhance their returns.

“Given the price weakness now, probably storing corn lets people take advantage of a rebounding basis into the spring of 2015,” Mr. Foreman said. He recommended selling futures as a hedge along with on-farm storage.

“Commercial storage is not so good because you have to pay up front,” he noted.

But Mr. Setzer said storing corn and waiting for higher prices is a poor strategy unless a producer’s risk management is fairly sophisticated.

“Just sitting on open bushels, you are at the total mercy of the market, with no downside protection,” Mr. Setzer said. “In order to take advantage of any upside potential requires hedging.”

And, while the crystal ball currently doesn’t offer any obvious paths to firmer prices, everyone knows predicting the future in the grain markets is far from easy, Mr. Setzer added.
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