In the midst of an economy in which demand is decreasing, the USDA Crop Report on Friday indicated the supply of corn and soybeans is increasing. With that news, the grain markets plummeted toward yesteryear when supply overshadowed demand and the government loan program was a legitimate option for every farmer. We’re not there yet, but the precipitous fall in grain prices in a weak economy was probably not part of your marketing plan.

If you need to revise your marketing plan, you’ll have the benefit of information from a trio of Extension marketing specialists. Chad Hart at Iowa State, and Melvin Brees at the University of Missouri both released their analysis of the report on Friday. Additionally, Chris Hurt at Purdue released his monthly newsletters on corn and soybeans. (Follow the links to their publications.)

Chris Hurt begins by saying prayer might be appropriate at this point because the bear market is not only out of the hands of agriculture, but out of the hands of mankind to do anything about it. Hurt says the financial markets are not only falling but the currency is deflating, “Prices of crude oil will drive corn prices. Cash corn prices will tend to run 4.5% to 5% of the crude oil price per barrel. The current $78 crude means $3.50 to $3.90 cash corn prices. Crude, just a few dollars lower at $70, would mean $3.15 to $3.50 cash corn prices. Crude futures right now are $82 for May 2009—that’s $3.70 to $4.10 corn next spring-probably much lower than most producers are hoping for!”

Chad Hart at Iowa State notes the substantial drop in USDA’s estimated season average prices. USDA’s Supply and Demand Report reset the ranges for corn for soybeans, “USDA significantly updated its season-average prices for corn and soybeans to $4.70 per bushel for corn and $10.35 per bushel for soybeans. The corn price is off 80 cents per bushel, while the soybean price is down $2 per bushel from last month’s estimates. While these are sizable drops in price, they look relatively optimistic compared to futures prices. Based on Oct. 9th settlement prices, the futures markets were projecting 2008 season-average prices of $4.27 for corn and $9.79 for soybeans.”

Hart agrees with Hurt that factors outside agriculture will continue to strongly influence farm markets. He says the outlook for fuel demand has dropped and credit markets have tightened or ceased to function. Hart says the higher input costs and lower commodity prices will put a squeeze on farmers, “The 2009 crop year was already looking to be a tighter year for crop producers, as input costs have ratcheted up. And just as it took a while for costs catch up on the upside, costs will also lag prices going down. Based on USDA current estimates of relative net returns, soybeans may be the most attractive play in 2009 given its lower production costs.” His chart indicates 2009 net returns at today’s prices would be about $230 for soybeans, $175 for corn, and $75 for wheat above variable costs of production.

Brees says the lower prices resulted from the higher supply estimates and the recent market action. As reported on Friday, USDA reduced corn acreage by 100,000, but an increase in the estimated yield, raised both production and ending stocks. At the same time, USDA reduced the yield estimates for soybeans, but raised acreage by 2.2 million acres, and that raised both production and ending stocks. Brees joined his counterparts in noting the significance of the limit down moves in the grain market Friday, and said, “The price downtrends remain intact and further downside price risk appears to exist.”

So what is the downside risk? Hurt says, “By historical standards, prices today are still high. Today, October 10, 2008, the December 2008 futures are at $4.08 which is the highest December futures price ever on this date. Let me say it once more: “corn futures prices are still at record highs by historical standards.” And he says the financial system has to recover before the grain market will. In the meantime, Hurt says seasonal movement will take corn prices higher, “Current bids across the storage season suggest an increase of about 60 cents per bushel in prices into next spring. For those with on-farm storage, and assuming 6% interest, this will net about 40 cents return above interest costs. Commercial storage appears to be about breakeven.”

For soybeans, Hurt says the USDA price estimate is higher than the market’s projection, possibly because the market is assuming reduced demand because of the world economy. “Another way to interpret the USDA price estimate is that soybean prices will recover by $1.25 per bushel (on average) if the financial crisis has only a minor impact on world income growth.” And for your marketing plan, Hurt says, “Returns to storage appear to be favorable with anticipation for about a 90 cent per bushel increase in prices into next spring. Subtracting 6% interest still provides an anticipated return of around 50 cents per bushel from on-farm storage above interest costs.” And he adds that with the dismal returns estimated for wheat and reduced soybean yields, double-cropping is not worth it, unless straw prices are high.

Summary:
In the wake of the financial market shock that drained liquidity out of the grain market, USDA’s higher supply and lower demand estimates further depressed commodities. If corn prices are driven by the oil market, corn prices may have more decline ahead of them. On-farm storage with a spring forward contract may provide a return to storage, but commercial storage for either corn or soybeans will be a financial wash.