The price of feed-grains is like the old game show "Let's Make a Deal". There are three separate situations that could surface, depending on weather and yields. Your prices for feed grains over the next year will depend on whether the situation behind door No. 1, 2 or 3 materializes.
Current carryover stocks are about 2 billion bushels for corn, about 270 million bushels for soybeans, according to Darrel Good, University of Illinois agricultural economist.
Some corn acreage has been planted to soybeans, mostly due to favorable loan rates and insurance. About 76.2 million acres of corn were planted, down from the intended 76.7 million. In addition (as of mid July), the crop was in slightly less favorable condition than last year, says Bob Wisner, agricultural economist, Iowa State University.
Now, let's see what's behind each of the doors.
Scenario No. 1 seems to be the most likely, as Good looks for corn yields to be near 135 bushels an acre. However, he points to summer weather and the size of the Chinese corn crop as two factors that could move corn prices either way.
Currently, Good forecasts corn prices for the next year to be around $2 a bushel, but a small Chinese corn crop could boost U.S. exports, and as a result, prices.
"China has the potential for a major upswing in exports, with about an 11 percent increase from a year ago if the country's drought continues," says Wisner.
Scenario No. 2 misses one factor that has soybean prices under pressure in the face of rising supplies. What's more, it does not depend on weather, or even the amount of U.S. acreage planted. South America on again harvested a record soybean crop, which has contributed to current low U.S. prices, says Good.
Turning attention to the United States, some acreage questions have lingered – mostly because of delayed plantings in the north due to a wet spring. Good points out that weather patterns for the rest of the growing season appear favorable, though weather is always difficult to predict.
Scenario No. 3 would require about an 8 percent to 10 percent drop in the amount of corn fed to livestock. Most of this decrease would come from less corn being fed to cattle, but it could lead to some reduction in the sow herd as well. While more sows and gilts being culled would add meat to the market in the short term, it could reduce the amount of hogs coming to slaughter in 2002 – a period in which hog marketings are expected to pressure packing capacity, according to Glenn Grimes, niversity of Missouri agricultural economist.
Given the grain markets' potential volatility, you might want to consider options to lock in today's current reasonable prices for corn and soybean meal. Wisner acknowledges that using pricing options depends on your individual situation. However, he also recognizes the favorable opportunities that current low prices present.
" Call options would seem to be a logical choice," says Wisner. " The December contracts probably make the most sense, because if the market strengthens with weather problems the December contracts should move higher." Since feed grains are your biggest production cost, now is the time to consider where your feed grains are coming from and at what costs.
The potential outcomes lie behind doors No. 1, 2 and 3, but the choice of which one comes to pass isn't yours – Mother Nature and crop yields will determine that. Still, you can devise your strategies to be prepared for whichever door opens.
Last year, the national average yield for corn was 137.1 bushels per acre; Wisner expects this year to be closer to 135 bushels. If that holds true, U.S. farmers would produce a 9.4-billion-bushel crop, down from 9.97 billion bushels last year. If that occurs, there will be a 1.4-billion-bushel carryover on Aug. 31, 2002, says Wisner. It would put the national average corn price at $2.15 a bushel – 30 cents higher than last year's average price – and it would reduce grain reserves.
Soybean yields were 38.1 bushels per acre last year. Wisner believes yields can about equal that again this year, with good July/August weather. With an additional 200,000 acres of soybeans planted this year, an average yield of 38 bushels an acre would produce a 2.85-billion-bushel soybean crop – up from the 2.77 billion bushels last year. That would result in a 2 percent increase in production and a 1 percent increase in the total supply.
However, Wisner expects demand to increase as well. Increased exports to China and Western Europe due to a poor crop and a ban on animal-feed proteins respectively, are the primary reasons for increased soybean demand.
This would result in prices staying fairly stable from last year, with soybeans averaging about $4.40 per bushel and soybean meal averaging about $160 per ton.
Near Record Yields
On the other hand, it is too early to predict how the growing season will pan out, and the crops could surprise the experts. If corn yields average 140 bushels per acre, which is above the trend line, the carryover would be about 1.7 billion bushels – down from 2.03 billion bushels this year. Under that scenario, corn prices could average10 cents higher than last year, at $1.95 per bushel. That would move December futures prices up to $2.25. Wisner says that even with near record yields, the December contract price would be $2.10 to $2.15 for a harvest average, modestly above last year.
If soybeans averaged 40.5 bushels an acre (a near-record yield) on the estimated 4.4 million acres planted, it would produce a soybean crop of 3.01 billion bushels – up 9 percent from a year ago. That would mean a carryover in August 2002 estimated around 430 million to 440 million bushels, with the expected loan deficiency payment. This scenario would result in season prices averaging about $4.10 per bushel and $148 per ton for soybean meal.
If the corn acreage dropped to 69 million acres, and yields came in at 112 bushels an acre because of drought, the crop would equal only 7.7 billion bushels. That's down almost 2 billion bushels. Carryover would drop to around 600 million bushels and U.S. farm prices would average $3 a bushel, with the December futures contract around $3.45, says Wisner.
He points out that a drought could cut soybean acreage and yield to only 35 bushels per acre or so. That would drop carryover 150 million bushels, which is close to the pipeline amount. If that happens, soybean and soybean meal prices would shoot up to a season average of $6.55 per bushel, hitting $7 at times. More importantly to you, soybean meal would rally $220 a ton.