This year’s feed grain outlook can be summarized by the old saying: “It changes like the weather.”

Analysis have predicted that grain prices would be low, provided this summer’s growth season encountered few weather problems.

However, early signs of drought across most of the Corn Belt made weather a concern. It also produced mild spring weather, which allowed for record early planting. USDA’s Grain Crop Summary for late May showed more than two-thirds of the nation’s soybean crop had already emerged. That’s more than double the total of a year earlier. Corn had emerged on 93 percent of the planted acre-age, a 73 percent increase from 1999. Of those acres, 70 percent of the crop was rated in good or excellent condition. In Iowa alone, 99 percent of the corn emergence was running a month ahead of usual maturity.

“Yields could still go either way,” says Bob Wisner, agricultural economist from Iowa State University. “If the crops get timely rains we could have record yields, but if July and August are hot and dry, yields could drop 10 percent to 15 percent below normal trends. There is potential for a great deal of price volatility.”

So, the weather holds the cards to your feed-grain prices this year.

Weather patterns aren’t exactly showing their hand. Elwynn Taylor, Iowa State University climatologist, says there is a 50/50 chance this year’s crops could have near record yields. He also says there’s a 17 percent chance yields will be severely hampered by drought.
Taylor points to last year’s moderate drought that began in the Eastern United States and moved west. It had little impact on last year’s crop, but did leave the soil very dry for this season. Drought conditions persisted through the winter, setting up moisture concerns. As May ended, rains had moved Corn Belt conditions from drought to normal. In some cases, too much rain and standing water was the new concern. The drought warning by the National Weather Service was removed by mid-June and if normal rainfall persists, drought conditions will not pose a threat in July and August.

Yet, the crops can’t completely shake the danger of drought because forecasters believe La Ni±a patterns will continue to influence weather through at least August. Taylor says ocean temperatures suggest that La Ni±a will persist and that weather patterns may be setting up for a summer drought, despite May’s catch-up rainfall performance. Taylor says one month’s data is not reliable. He notes that the 90-day average points to La Ni±a’s continued influence.

But even with a hot, dry summer it doesn’t mean crop yields will suffer as dramatically as in the past. Today’s seed has been genetically modified, not only for things like high-oil content and herbicide resistance, but also to resist drought. This might be the year such crops are put to the test.

Going into summer, the expected corn supply carryover was 18 percent of the annual use. That equals about a nine-week supply. Wisner says a four-week supply is necessary to fill pipelines, so there is a five- to six-week excess. That’s not as large as surpluses have been heading into previous drought years.

Soybean carryover was 12.6 percent of the annual, which is more than a six-week supply. A three-week supply is necessary to fill the pipelines, so that leaves a three- to four-week surplus.

Larger carryovers mean an 18 percent reduction in the crop from trend yields would require about a 30 percent reduction in use, depending on what happens to South America’s crops, says Wisner.

USDA’s final Planting Intentions Report showed that 73.9 million acres of soybeans were planted, which is up from 72.5 million last year. Corn acreage also increased to 77.9 million, up from 77.4 million.

However, actual acreage for both crops may come out higher. The weather played a role here as well. The mild winter may allow for more double-cropped soybeans following wheat.

Uncertainty about supplies and the extreme volatility in yield potential makes price projections tougher than a $2 steak. However, Wisner says you can expect $1.80-per-bushel corn prices if normal weather unfolds. That’s about 5 cents lower than last year’s average.

If drought persists and yields drop 15 percent or so below trend levels, Wisner sees the national average corn price moving to about $2.70 per bushel, with a high exceeding $3. Some local averages also could exceed $3 per bushel, he points out.

As for soybean meal, if normal weather unfolds prices should average about $157.50 per ton, which is down from last year’s $165. If yields are down, the price projection shoots up to $185 to $195 per ton, with the top exceeding $200 per ton, says Wisner.

Add it all up and it means if you haven’t already locked in some portion of your feed-grain needs, then you could face some upside price risk. So, you can either gamble on the weather or look at pricing options, depending on your risk-bearing ability.

“Call options are one way to protect against upside cash risk, but still get the benefits if prices drop,” says Wisner.

He points to a couple different strategies for using call options.

Wisner recommends getting a call at the money or a strike price; you could also get a position out of the money to reduce some of the risk of rising feed-grain prices.

Another possibility is to buy a call option at the futures price, wait for it to go up several strike prices and then sell the option back. “This approach can limit risk up to a certain point, but be cautious not to exceed the number of calls you purchased or you will actually assume more risk.”

So, the feed-grain outlook for the next six months is that prices could be extremely volatile. If the crops get timely rain, they could produce new record yields. But if drought conditions resurface, you could be looking at $3 corn. You can gamble with Mother Nature or play it safe and lock in feed costs at reasonable rates.

Where the Rains Fall
Much of the Corn Belt was covered in drought conditions earlier in the planting and growing season. A good portion of the Midwest recovered by the first of June, at least enough to bring the national average back to normal moisture levels.

Still, some areas have not fully pulled out of the drought, and some others were likely to have a hot, dry July and August. Problems persist in Missouri, Southern Iowa, parts of Kansas, Nebraska and Illinois. However, these areas will not greatly affect the feed-grain picture, says Elwynn Taylor, Iowa State University climatologist.