1. Crop Market Price Outlook Utilizing Cash Marketing Tools Selling Old & New Crop Corn & Soybeans Crop Market Outlook & Risk Management Strategies December 2009 Steven D. Johnson Farm & Ag Business Management Specialist (515) 957-5790 sdjohns@iastate.edu www.extension.iastate.edu/polk/farmmanagement.htm

2. Presentation Objectives Overview of 2009 Crop Supply/Demand, Price Outlook & Marketing Strategies Review Grain Storage & Cash Marketing Decisions Highlight 2010 Crop Cost of Production Estimates Provide 5 Strategies for Capturing $4/bu Cash Corn & $10/bu Cash Soybean Prices Summarize 5 Strategies & 5 Websites for Managing Crop Risks & Revenue

3. 193 53 182 49 174 46 192 53 177 51 182 52 190 52 161 48 179 51 Iowa 2009 Crop Yield Estimates Source: USDA Iowa NASS, November 2009

4. U.S. Corn Supply/Demand & Price Midpoint $3.55/bu Source: USDA WASDE, Nov. 10 th, 2009 2008-09 Estimated 2009-10 Projected Area Planted 86.0 86.4 Area Harvested 78.6 79.3 Yield153.9 162.9 Beginning Stocks1,6241,674 Production12,10112,921 Imports 14 10 Supply, Total13,73914,605 Feed & Residual 5,254 5,400 Food, Seed & Industrial 4,953 5,480 Domestic Use, Total 10,20710,880 Exports 1,858 2,100 Use, Total 12,06512,980 Ending Stocks 1,674 1,625 Average Farm Price $4.06 $3.25 - $3.85

5. Corn Balance Sheet Source: Wisner, ISU Biofuels Economist, November 2009

6. Corn Estimates through 2010-11 $4.20 $4.06 $3.45 $3.75 Source: Wisner, ISU Biofuels Economist, November 2009

7. Nearby Corn Futures Source: www.jimwyckoff.com, Dec. 3 rd, 2009

8. Sept$ 4.12 July $ 4.04 May$ 3.95 Mar.$3.84 Corn Futures Carry Dec. 2010 $4.20 Source: www.cmegroup.com December 7 th, 2009 Good Carry into spring/summer months – utilize on- farm storage and monitor grain quality Dec. 2011 $4.32

9. Corn Basis Trends Source: www.farmprogress.com December 2009 Wider than Normal with Late Harvest Pressure

10. Corn Storage Costs Assumption: Corn is Valued at $3.50/bu - Financed @ 7% APR.20.30.32.49.44.69.56.89 Source: Johnson, ISU Extension, November 2009 Storing until April: Costs an extra 20 to 40 cents

11. Corn & Soybean Storage Issues Source: www.iowagrain.org, November 2009

12. Source: USDA WASDE, Nov. 10 th, 2009 U.S. Soybean Supply/Demand & Price Midpoint $9.20/bu 2008-09 Estimated2009-10 Projected Area Planted 75.7 77.5 Area Harvested 74.7 76.6 Yield 39.7 43.3 Beginning Stocks 205 138 Production2,9673,319 Imports 13 8 Supply, Total3,1853,465 Crush1,6621,695 Exports1,2831,325 Seed 95 94 Residual 6 81 Use, Total3,047 3,195 Ending Stocks 138 270 Average Farm Price$9.97 $8.20 - $10.20

13. Soybean Balance Sheet Source: Wisner, ISU Biofuels Economist, November 2009

14. Soybean Estimates through 2010-11 $10.10 $10.00 $8.95 $8.25 Source: Wisner, ISU Biofuels Economist, November 2009

15. Nearby Soybean Futures Source: www.jimwyckoff.com, Nov. 13 th, 2009

16. Jul.$10.76 May $10.69 Mar.$10.61 Jan$10.53 December 7 th, 2009 Soybean Futures Carry Nov. 2010 $10.47 Source: www.cmegroup.com Lack of Carry, little incentive to hold soybeans beyond winter months Nov. 2011 $10.37

17. Soybean Basis Trends Source: www.farmprogress.com December 2009 Narrows Post Harvest: Flat through Summer

18. Soybean Storage Costs Assumption: Soybeans are Valued at $9.50/bu - Financed @ 7% APR.10.29.40.49.70.69 1.00 Source: Johnson, ISU Extension, November 2009 Storing until April: Costs an extra 40 to 60 cents

19. Percent of Cash Crops Sold by Month Source: USDA NASS, 1990-09, October 2009 Corn Sales: Fall Sales, Peak in January, level rest of year Soybean Sales: Peak in October, High in January, decreases monthly

20. Marketing Decision Chart Basis Weakens Basis Strengthens Futures Decrease Futures Increase Expected Change Basis Contract Sell Cash and Buy Futures Call Options Minimum Price Contract, Fixed Basis Store & Wait to Price Delayed Price Contract Minimum Price Contract, Variable Basis Cash Sale Forward Contract Hedge Hedge to Arrive/NBE Put Options Source: ISU Extension Economics, December 2009

21. #1: Corn Basis Contract (Replace Cash Sale with March Futures) Deliver Cash Corn and Cut Storage Costs. Fixes the Basis, but not the Futures Price. Elevator/Processor replaces these bushels with a March Futures Contract. – Corn example: March ‘10 futures closed at $3.84 the day of the transaction. What is your Potential Price received? Cash selling price - transaction fee – March futures by 3/1 = Potential Price $3.64 + -.02 $ 4.24 ( + $.40) $ 4.02 /bu Source: Johnson, ISU Extension, December 2009

22. #2 Corn Minimum Price Contract Sell Cash Corn & Replace with a Call Option Also called a Minimum Price Contract – Corn example: Deliver Cash Corn and Cut Storage Costs. Fixes the Basis, but not the Futures Price. Cash selling price is $3.62, May ‘10 futures closes at $3.95, a Call Option with an $4.20 Strike Price has a.23 cent premium. a) What is the Minimum Price received? Cash selling price – call premium – brokerage fee = Minimum Price $3.62 -. 23 -.02 $.65 Source: Johnson, ISU Extension, December 2009 b) What is the Potential Value of this Call? May Futures in mid-April – Strike Price = Cash Value of Call Option $4.85 - $4.20 $ 3.37

23. #3 Soybean Minimum Price Contract Sell Cash Soybeans & Replace with a Call Option Soybean example: Deliver Cash Soybeans and Cut Storage Costs. Fixes the Basis, but not the Futures Price via a Call Option. Cash selling price is $9.94, May ‘10 futures closes at $10.69, a Call Option with an $11.00 Strike Price has a.75 cent premium. a) What is the Minimum Price received? Cash selling price – call premium – brokerage fee = Minimum Price $9.94 -.75 -.02 $ 1.00 Source: Johnson, ISU Extension, December 2009 b) What is the Potential Value of this Call? May Futures in mid-April – Strike Price = Cash Value of Call Option $12.00 - $11.00 $9.17

24. 2010 Crop Cost Estimates $667 $629 $437 $4.04/bu $3.49/bu $8.74/bu Cost per bushel Average Yield 165 bu/a 180 bu/a 50 bu/a Source: Duffy, ISU Extension Economist, December 2009

25. #4: HTA New Crop Corn Now Hedge-to-Arrive Contract (fixes futures price but not the basis) – Example: Dec. ‘10 Corn futures closed at $4.20, Fall Harvest Basis next October is expected to be $ -.30 under December corn futures. Dec. ‘10 Corn Futures –Expected Basis = Expected Cash Price $4.20 -. 30 $ 3.90 Source: Johnson, ISU Extension, December 2009 What is the Expected Cash Price?

26. #5 Forward Contract New Crop Soybeans Now Cash Forward Contract (fixes both futures price and basis) – Example: Nov. ‘10 Soybean futures closed at $ 10.47. Fall Harvest Basis next October is offered at $ -.40 under November soybean futures. Nov. ‘10 Soybean Futures – Basis = Forward Cash Contract Price $10.47 -. 40 $ 10.07 Source: Johnson, ISU Extension, December 2009 What is the Forward Cash Contract Price?

27. 5 Strategies for $4 Corn & $10 Soybeans Know Your Cost of Production Pre-Harvest Sell Bushels; Reduce Handling, Storage & Risk Use Early Sales to Cover Fall/Winter Cash Flow Sell In-Town Bushels First, Monitor On- Farm Quality Learn to Use a Variety of Marketing Tools Source: Johnson, ISU Extension, December 2009

28. Risk Management Web Sites Crop Risk Management - ISU Polk County (Newsletters, Updates and Webcasts) www.extension.iastate.edu/polk/farmmanagement Dr. Chad Hart - ISU Extension Grain Marketing www.econ.iastate.edu/faculty/hart Iowa Grain Quality Initiative – ISU Extension www.iowagrain.org Farm Doc – U. of Illinois Extension www.farmdoc.illinois.edu Ag Decision Maker – ISU Extension (Decision Tools, Newsletters, Publications and Voiced Media) www.extension.iastate.edu/agdm Source: Johnson, ISU Extension, December 2009