Editor's note: The following was written by Todd Hubbs, agricultural economist at the University of Illinois.
The current price structure of corn and soybean futures markets indicate positive carry in both markets. That raises the question of whether producers should make decisions about grain sales. The decision by producers to store corn or soybeans should be determined by the returns to storage.
The current projection for 2017-18 marketing-year corn supply is 16.573 billion bushels, 367 million bushels less than 2016’s supply. The soybean supply is projected at 4.777 billion bushels, 249 million bushels more than the 2016 supply. Total supplies – production, beginning stocks and imports – of wheat, feed grains and soybeans are currently estimated or forecast by the U.S. Department of Agriculture to be 21.780 billion bushels, 16 percent less than supplies of a year ago. The USDA estimates on-farm and off-farm grain-storage capacity as of Dec.1 each year. Total storage capacity as of Dec. 1, 2016, was estimated at 24.317 billion bushels.
Although storage capacity is not consistent in different areas or by type of crop, storage capacity appears capable of handling 2017 crops. Harvest bids for corn and soybeans possess a weak basis, although conditions vary in different regions. At interior elevators in south-central Illinois, current harvest-time corn bids reflect an average basis of about -32 cents per bushel. That basis is about 7 cents weaker than the basis at this time in 2016 and about 3 cents weaker than two years ago.
The carry from December 2016 to July 2017 in the corn-futures market is about 26 cents per bushel, about 3.71 cents per month. For soybeans, current harvest-time bids in south-central Illinois reflect an average basis of about -3.25 cents per bushel. The basis is about 10 cents weaker than at this time in 2016 and about 2 cents weaker than that of two years ago. The carry in the soybean futures market from November 2016 to July 2017 is about 34 cents per bushel, about 43 cents per month.
A producer’s storage decision is based on their storage capacity and the expected returns from storage. Returns to storage can be captured by selling the crop for later delivery at a price that exceeds the spot cash price by more than the cost of owning and storing the crop. That can be accomplished through a forward cash contract or by selling deferred futures contracts. Using a forward cash contract eliminates all uncertainty about the return to storage. By selling futures to price a stored crop, uncertainty about future basis levels can impact the actual returns to storage. Returns to storage can also be captured by storing the crop unpriced in anticipation of higher cash prices. Forward pricing eliminates downside price risk but also eliminates a return from higher price levels. Storing a crop unpriced allows the producer to capture higher prices, but provides no protection from lower prices.
For corn, average harvest bids Sept.1 in south-central Illinois are near $3.24 per bushel, slightly less than the $3.30 mid-point of the range of the U.S. average farm price projected by USDA. The relatively low price, weak basis and carry futures market encourages storage of the 2017 crop. In south-central Illinois, the average basis for corn typically strengthens to about -10 cents by spring, as it did in 2015 and 2016. In 2017, the average basis remained weak throughout the spring with the strongest basis occurring in late April at -14 cents relative to the July 2017 futures price. Given the current production and demand scenarios, an expectation of the typical basis pattern for corn during this marketing year is reasonable.
As of Sept.1 average harvest-time bids for soybeans in south-central Illinois are near $9.17 per bushel, below the mid-point projection of $9.30 for the U.S. average farm price projected by USDA for the 2017-18 marketing year. The average basis in south-central Illinois usually strengthens in the spring but there has been no discernable pattern in recent years. In 2017 soybean basis remained weak, with the strongest basis occurring in early June at -28 cents relative to the July 2017 futures price.
Basis risk could be substantial this marketing year, depending on South American crop production and U.S. export-market competitiveness. The uncertainty surrounding corn and soybean yield projections for 2017 may encourage a patient approach to pricing crops. By storing corn and soybeans unpriced, one holds an expectation of prices increasing by more than the cost of owning and storing these crops. During the short term, significantly higher prices require a large reduction in the production forecasts by the USDA, Sept. 12 or Oct. 12. Over a longer horizon, higher prices may occur if demand is stronger than currently forecast. Southern-hemisphere crop problems could also materialize to provide a price increase.