With droughty conditions expanding in the Cornbelt, and crop conditions deteriorating measurably for the first time, market volatility has increased just as USDA prepares to confirm planted acreage. Any farmer who wanted to take advantage of profitable prices is likely nervous over the prospect of pulling the trigger. With only 10 days away from the USDA’s next market-moving report, let’s assess the crop, get a handle on the impact of the report, and conclude with some thoughts about marketing.

The Cornbelt is a dichotomy of wet and dry when you read the comments of Iowa State University Outlook Specialist Bob Wisner. He says the current market volatility results from traders being uneasy about the strong demand for grain and the less than satisfactory growing conditions in many parts of the world; “This week’s NOAA drought index map shows most of Ohio, Indiana, and about 2/3 of Illinois rated as ‘Abnormally Dry.’” Wisner notes that the grain trade is anticipating better corn this year because crop condition ratings have been regularly exceeding those of the past three years. But he warns that early season ratings are not good predictors of the crop at the end of the season. And he says his recent travels through and around Iowa indicates mediocre yield potential, “With ideal weather, above-trend yields cannot be ruled out, but the later-than normal plantings, increased corn-after-corn plantings, and increased acreage in lower yielding regions suggest caution is needed in translating the weekly crop condition ratings into potential yields this early in the season.”

Iowa State’s Wisner says the expected large increase in corn acreage this year will have to become the trend based on increased demand. He’s forecasting 150.5 bushels per acre with approximately normal summer weather. And he believes that with yield trends the 2012 crop will provide 5.5 billion bushels for ethanol production; but he doubts that sufficient acreage will be available, based on demands from other crops.

Wisner’s counterpart at the University of Illinois, Outlook Specialist Darrel Good, wants farmers to appreciate the importance of the information coming June 29 when USDA will be releasing its updated acreage information, as well as the quarterly grain stocks estimate. In his weekly newsletter, Good says the markets will be interested in three specific pieces of information:
1) “First, is the total planted acreage (harvested acreage of hay) of all crops. Intentions for all non-hay crops reported in January (winter wheat) and March (most other crops) totaled 256.37 million acres, 3.26 million more than planted to those crops in 2006.” He says there may actually be a 2% increase in acres, or the wet spring may have washed away planting intentions on those acres.
2) “The second important piece of information in the Acreage report is obviously the estimates of planted acreage of individual crops. A lot of the focus will be on corn and soybeans. In March, producers reported intentions to increase planted acreage of corn by 12.1 million acres (15 percent) and to reduce planted acreage of soybeans by 8.4 million acres (11 percent). There are clear differences of opinion about actual planted acres relative to these intentions.”
3) “The third piece of information to be gleaned from the Acreage report will be intentions for harvested acreage of individual crops. While it is early in the production cycle for spring planted crops, it will be useful to see if early season weather conditions had yet impacted the expected level of abandoned acres.” He says the dry southeast and eastern Cornbelt and the wet western Cornbelt may have resulted in less acres planted and more acres abandoned.

Darrel Good is anticipating that planted acreage fell a bit short of the USDA’s March projection and that abandoned acres will be higher than expected. If that is the case, he says mid summer weather will increase the volatility of the market.

So how do you adjust your marketing plan in the midst of uncertainty? Melvin Brees, the University of Missouri Outlook Specialist at the Food and Agriculture Policy Research Institute,
acknowledges that marketing is difficult, particularly when markets don’t perform as expected; “However, successful marketing is not necessarily being right by selling at the highest prices, which is nearly impossible to do anyway. Successful marketing is avoid¬ing price lows and capturing profitable pricing opportunities.” Brees says with the corn, bean and wheat markets disregarding significant fundamentals and making contra-seasonal moves, they are all currently in uptrends and it is hard to make selling decisions when you want to take advantage of potentially higher prices. But Brees also sympathizes with many farmers concerned about not raising a crop that had been forward contracted, “Delayed planting, flooded out crops or rapidly drying soils add to production risk in many areas and are making new crop sales deci¬sions more difficult. It is understandable that producers say, ‘What if I sell more than I produce, especially if prices go even higher and I have to buy out of the contract?’”

Another current marketing concern is the unusually weak basis. While there are some strong cash bids for old corn, that is not the case for new corn. Brees says a survey of Missouri elevators finds a 40¢ basis for new corn, a 60-70¢ basis for new beans, and a nearly $1 basis for new wheat. If the weak basis is an indication to avoid sales, what do you do with the crop? When you compare it to the USDA’s forecast for season average prices, Brees says even with the wide basis, cash bids are in the upper half of the range of season average prices. (The USDA’s current farm price range projections for 2007-08 crops are: corn from $3.10 to $3.70, soybean prices from $6.65 to $7.65 and wheat from $4.50 to $5.10.)

To avoid the wide basis, Brees says there are several marketing opportunities that need some consideration:
1) Weak basis can possibly be avoided by using futures/options to make sales or forward contracting with hedge-to-arrive (no basis established) cash contracts. However, basis may not improve anytime soon because of large old crop supplies.
2) Producers with storage facilities and semi-trucks can sometimes find alternative selling locations that offer significant returns within efficient hauling distances.
3) Wheat producers, who see no carry in the market that pays for long term storage, must realize that “storage returns will need to come from higher futures price levels or basis improvement. Basis improvement (strengthening or narrowing of basis) will likely be limited due to competition for storage space from corn and soybeans as the fall harvest approaches. Higher futures price levels may be possible, but it is important to recognize that prices are already historically high and that storing is the same as speculating on higher futures prices.”

Summary:
Highly profitable markets are providing great challenges to producers. Since the basis is wide, cash bids are weak, but are still in the upper range of season average prices. However, with the extremely wet or dry weather across the Cornbelt, forward contracting reasonable amounts of a crop have been a challenge. Many producers wanting to lock in healthy prices prior to next week’s USDA acreage report face the prospect of questionable yields. The report will have many important pieces of information, which will confirm planted acreage, and give indication of any slippage, as well as potential abandonment. While it will indicate acreage, the size of the crop remains in question as dryness overtakes much of the Cornbelt forcing crop ratings downward.