1. Maintaining Profitability in Challenging Times
Crop Advantage Series
January 2010
Chad Hart
Assistant Professor/Grain Markets Specialist 1

2. Iowa Corn Prices vs. Costs
Early numbers from Mike Duffy show corn costs backing down to 2008 crop year levels.

3. Iowa Soybean Prices vs. Costs
Soybean costs also fall, but hold above 2008 crop year levels.

4. U.S. Corn Supply and Use 2007 2008 2009 Area Planted (mil. acres) 93.5
86.0
86.5
Yield
(bu./acre)
150.7
153.9
165.2
Production
(mil. bu.)
13,038
12,092
13,151
Beg. Stocks
1,304
1,624
1,673
Imports 20 14 10
Total Supply
14,362
13,729
14,834
Feed & Residual
5,913
5,246
5,550
Ethanol
3,049
3,677
4,200
Food, Seed, & Other
1,338
1,276
1,270
Exports
2,437
1,858
2,050
Total Use
12,737
12,056
13,070
Ending Stocks
1,764
Season-Average Price
($/bu.)
4.20
4.06
3.70
USDA’s 2009 projections based on conditions around Dec. 1. It would be the 2nd largest corn crop, just behind Demand is projected to recover across the board (higher feed, ethanol, and export demand), but we may want to watch feed demand as this increase is likely harvest loss (not feed use). Ethanol demand is about 100 million bushels above mandate levels. Export demand is being helped with some smaller customers buying early. Ending stocks currently shown as flat, but will likely decline with the additional harvest losses. Current price estimate of $3.55/bushel is well below market levels ($ ).
Source: USDA 4 4

5. U.S. Soybean Supply and Use
2007
2008
2009
Area Planted
(mil. acres)
64.7
75.7
77.5
Yield
(bu./acre)
41.7
39.7
44.0
Production
(mil. bu.)
2,677
2,967
3,361
Beg. Stocks
574
205
138
Imports 10 13 8
Total Supply
3,261
3,185
3,507
Crush
1,803
1,662
1,710
Seed & Residual 93
101
177
Exports
1,159
1,283
1,375
Total Use
3,056
3,047
3,262
Ending Stocks
245
Season-Average Price
($/bu.)
10.10
9.97
9.65
USDA’s 2009 projections based on conditions around Dec. 1. It would be the largest soybean crop. Crush demand is projected to recover slightly, based on soybean meal export demand. Export demand has remained strong as China continues to buy and other markets have started to pick up. Longer-term, we will see increased export competition from South America. Ending stocks are rebounding, but still very tight. Current price estimate of $9.50/bushel is well below market levels ($ ).
Source: USDA 5 5

6. Storage Issues Source: Hurburgh and Elmore, ICM News, 10/15/09
Storage and quality issues are concerns. Two wet crops in a row, increased drying costs. Hail damage in some areas leading to mold problems.
Source: Hurburgh and Elmore,
ICM News, 10/15/09 6 6

7. Soybeans – Argentina & Brazil
Area has shifted strongly to soybeans. And production is expected to rebound from last year’s drought. So we will have a lot more competition on the export front in a few months as their harvest kicks in.
Source: USDA 7 7

8. Smaller Livestock Numbers
Numbers continue to fall. Cattle showed a slight increase a couple of months ago due to the big drop in numbers from fall 2008 (percentages are changes from the previous year). Hogs and dairy cattle are off by 2 percent. Poultry has worked its way up to zero. Poultry is the 1st sector where we expect to see growth.
Source: USDA, NASS, various reports

9. Renewable Fuels Standard (RFS)
The renewable fuels blueprint for the next 13 years. Corn-grain based ethanol is a conventional biofuel. Conventional biofuels build to 15 billion gallons by 2015, after that cellulosic takes off to 16 billion gallons by 2022. 9

10. Crude Oil Prices Sources: EIA, NYMEX
Crude oil is working its way back up, providing room for higher ethanol and crop prices.
Sources: EIA, NYMEX

11. Corn Futures Trade Source: CFTC
Another factor is a recent return of the funds in the market.
Source: CFTC 11 11

12. Corn
The relationship between corn prices and ending stocks used to be fairly stable, but…

13. Corn
The next few years have changed that relationship. Crop prices are now much more responsive to tighter stocks.

14. Iowa Crop Basis
The corn basis has been around its average. Tight soybean stocks and strong export demand led to a flip in the soybean basis. As harvest progress picked up, weakness built in. I expect basis levels will tighten as we work through this winter and spring, back towards average levels (but not quite reaching the averages).

15. Projected 2009 Season-Average Corn Price
The futures market was more bearish over most of the growing season, but has flipped to the bullish side since October. The futures market has consistently pointed to a 2009/10 season-average price of $3.70 to 3.80 for the past month.

16. Projected 2009 Season-Average Soy Price
As with corn, the futures market has flipped to the bullish side since October. The futures market has consistently pointed to a 2009/10 season-average price of $9.50 to for the past month, mostly in the $9.80 range.

17. Corn Futures Source: CBOT, 1/12/10
Fairly good carry in the corn market through July. Dec futures point to higher prices for the 2010 crop and higher insurance prices this spring.
Source: CBOT, 1/12/10

18. Pricing Dec Corn
Sources: CBOT, ISU Extension

19. Soybean Futures Source: CBOT, 1/12/10
The soybean market has built in a little carry through July, but prices fall after that. The fall is partially based on the upcoming South American crop. Futures for the 2010 crop are hanging in the $10 range. Soybean crop insurance prices should be higher for 2010.
Source: CBOT, 1/12/10

20. Pricing Nov Soybeans
Sources: CBOT, ISU Extension

21. Seasonal Pricing Patterns
Source: USDA, NASS,
Monthly Price Data

22. Decision Chart Futures Increase 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
Basis
Weakens
Expected
Change
Basis
Strengthens
Hedge
Hedge to Arrive
Put Options
Cash Sale
Forward Contract
Futures
Decrease

23. Iowa Corn Prices vs. Costs
Early numbers from Mike Duffy show corn costs backing down to 2008 crop year levels.

24. Iowa Soybean Prices vs. Costs
Soybean costs also fall, but hold above 2008 crop year levels.

25. Supplemental Revenue Assistance Payments Program (SURE)
Part of the 2008 Farm Bill
Permanent disaster assistance
Provides payments to producers in disaster counties for crop losses
Run by the Farm Service Agency, USDA
Covers the crops

26. 2008 SURE Map

27. 2009 SURE Map

28. Average Crop Revenue Election (ACRE)
ACRE is a revenue-based counter-cyclical payment program
Based on state and farm-level yields per planted acre and national prices
Producers choose between the current price-based counter-cyclical payment (CCP) program and ACRE
Program has state and farm trigger levels, both must be met before payments are made

29. ACRE Set-up for 2009 Iowa Corn
Year
Yield per Planted Acre
(bu./acre)
2004
181.0
2005
173.0
2006
166.0
2007
171.0
2008
169.0
Olympic Average
Year
Season-average Price ($/bu.)
2007
4.20
2008
4.06
Average
4.13
So the expected state yield would be bushels per acre and the ACRE price guarantee would be $4.13 per bushel.

30. ACRE vs. CCP
CCP pays
No CCP payments
No ACRE payments
ACRE pays out

31. Quick Comparison (Your results may vary)
Source: William Edwards, ISU Extension

32. Fear, Greed, and Ego Fear of making a bad decision
-- Watching prices slip away as you wait
Greed of expecting even higher prices
-- Not taking advantage of good price opportunities
Ego of wanting to claim you caught the market high
-- “Lake Wobegon” marketing

33. Ego
Greed
Fear
Agriculture’s link to the energy markets has been a strong one. Corn and soybean prices have tracked with oil prices since late in 2006.

34. Marketing Plan
To avoid fear, greed, and ego dominating your marketing, have a plan and stick to it.
A marketing plan outlines your market strategy and your marketing objectives.
It should examine marketing opportunities before and after harvest.

35. Marketing Objectives Get the highest selling price Reduce price risk
Pretty tough to do
More realistic objective: Obtain better than average prices
Reduce price risk
Cover cash flow needs
Minimize tax liability
Look at short and long-term goals for your business

36. Knowing Your Farm Financials
…Provides you several targets for your marketings
Do prices cover your cash expenses, meeting your cash flow needs?
Do prices cover your total expenses, providing profit and adding to your net worth?
On the production side, we often compare yields to trend; on the marketing side, we need to compare prices to per-unit costs.

37. Building a Marketing Plan
5 basic steps:
Estimate number of bushels to sell
Calculate breakeven price
Project price and yield scenarios
Compare pricing tools and analyze market opportunities
Develop a pricing plan

38. Bushels to Sell Breakeven Costs What’s your expected production?
What do you have in storage?
What about on-farm use?
Breakeven Costs
What are your production costs?
What are your storage costs?
On-farm vs. off-farm?
What are your cash flow needs?

39. Tools and Opportunities
Scenarios
Seasonal price trends
Weather outlook
Export picture
Livestock outlook
Tools and Opportunities
Market tools: Futures, options, forward contracts
Government tools: Crop insurance, marketing loans, CCP/ACRE

40. Tentative Pricing Plan
Outline realistic pricing targets
Have periodic price targets and quantities to sell
Have patience and be willing to reevaluate price goals
Remember it’s hard to lose money when making a profit

41. Thank you for your time. Any questions. My web site: http://www. econ
Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: