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Grain market outlook suggests considerations of price protection

May 9, 2013 | 0 comments

There's no precise information on the subject but it's likely that no more than 10 or perhaps 15 percent of the grains sold into the commercial market in the United States had been covered with a risk management plan on price.

This information is according to Jim Cronin, the ag risk management advisor at Advance Trading's branch office in Janesville.

Cronin offered that estimate in response to a question at the Extension Service's semi-annual farm management update for ag professionals.

He would like to see that number be much higher because of what having price protection could mean for the bottom line of grain producers.

Grain prices have been at historically high prices for unprecedented periods in recent years but that's no guarantee for the future, Cronin warned.

He pointed out that those high prices have already been a factor in reduced domestic and export demand for grain supplies from the United States

He also shared that prices have already moderated in response in part because livestock growers have switched to feeding wheat as a partial replacement for corn in some cases.

Cronin emphasized that Advance Trading, which was formed in 1980 to provide independent and unbiased information to grain elevators and feed mills, is not in the business of predicting prices.

Now serving the full spectrum of commerce in grains, the Bloomington, IL-based company urges parties to use the available tools such as options to protect against downward price movements.

Although 2013 was not shaping up as a great production year by early May, Cronin stated that two or three consecutive years of bumper crops would tumble prices for corn and soybeans from where they have been.

As an example of volatility, he recalled that on-farm prices of corn dropped below $4 per bushel in 2009 while soybeans were below $8.

Insurance Shortfalls

Grain growers should not be totally satisfied with crop insurance coverage because there are holes in it when prices fall.

In addition, no protection is available for 2014 crops with insurance while protections are available for 2014 with options based on futures prices for the year.

He suggests that at a minimum they protect profitable prices with put options and consider call options if a price has been contracted for but the market promises an upturn on the commodity.

With soybeans in particular, South America (mainly the duo of Brazil and Argentina) has become the world's top production area with a projected current crop yield of nearly 5.3 billion bushels - up by 1 billion bushels from a year ago and some two-thirds more than the U.S. crop of 3.015 billion bushels in 2012, Cronin indicated.

Even with seaport backups and poor internal transportation in the southern hemisphere, he warned that this is not a good sign for prices and market demand in the U.S.

Regarding corn, a return to trendline production would put carryover reserves at comfortable levels, especially if the downward trend on usage for livestock feed, ethanol production, and exports (down by one-third since 2007) continues, Cronin observed.

Prices have already rationed demand for corn and, except for possibly a strong basis this summer in the wake of a very late planting of corn, there is no strong evidence at the moment for much of an increase in corn prices, he stated.

Late Crop Season

Cronin is not greatly concerned about the very slow rate of corn planting this year - only 5 percent in the nation as of April 28 compared to 50 percent in 2012.

He referred to one northern Illinois client who expects to be able to plant 8,000 acres within a span of three days.

An emerging concern, often expressed by many parties, is the accuracy of the federal statistical reports on crop acreages and likely yields, Cronin remarked.

He said such a concern may be valid at least in part because of retirements - both by National Agricultural Statistical Service employees and private grain sector representatives.

Those individuals are accustomed to working with one another to provide the public with statistics that proved to be close to actual numbers but this line of personal communication and acquaintance is breaking down, Cronin suggested.

He finds that the phone calls formerly made by parties at both ends of the spectrum are no longer being made while other sources are being used to compiling statistics.

Regardless of what is happening elsewhere in the grain production and marketing sector, Cronin's prescription for growers is to develop a marketing plan and stick to it rather than taking an in and out approach.

He can be reached by e-mail to jcronin@advance-trading.com or on mobile phone at 608-558-9400. The company has a website at www.advance-trading.com.

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