NC State Extension Publications

Corn Market Outlook

Corn prices suffered a severe decline in 1998 and continued to be poor through most of 1999. Three years of good weather and yields in the midwest coupled with a sag in demand from China and other Asian caused corn prices to fall to their lowest levels in over 30 years. Only the strong basis (difference in price between the Chicago Board of Trade corn price and local market price) kept corn prices in North Carolina from falling below $1.80 per bushel.

Clearly, this situation makes it difficult to be optimistic about corn planting intentions for the next few years. Little improvement is expected in export demand until late in 2000. The key to an improvement in corn prices is an increase in export demand. This combined with lower acreage planted could be the stimulus for rising corn prices starting in late 2000. In developing a market plan for the next few years, it will be important to keep track of corn carryover and use. Currently, the corn stocks-to-use ratio is 20%. This indicates that expected corn prices for the first four months of 2000 are between $2.30 and $2.60 per bushel. A reduction in the stocks-to-use ratio to 10-12% would increase corn price expectations to $2.60 to $2.75 per bushel. Using current figures for corn stocks and corn use, corn producers can calculate the stocks-to-use ration by dividing the corn stocks figure by corn use. A professional marketing service or your extension marketing specialist can help you use the stocks-to-use ratio to determine potential corn prices.

The other factor in determining when and at what price to market corn is the weather. Corn producers should pay particular attention to weather in the corn belt. If dry weather is experienced in this region, corn prices, particularly new-crop corn, should increase with a strongly favorable basis. If adequate moisture falls in the corn belt, expect weak prices and basis. While the current market outlook may seem poor, producers should keep in mind that rapid changes can occur in commodity markets. A surprise increase in demand or poor weather can cause markets to fluctuate wildly. Corn growers should watch for opportunities to lock in a profit and then take advantage by pricing at least part of the crop. It will be critical that corn growers develop a risk management strategy to cover costs and income needs. Attention to basis changes, particularly during the summer months, could signal opportunities to price new-crop corn. A good marketing plan could be the difference between making money and losing money in corn production.

Market Strategies for Corn Producers

Risk Management

Successful farmers understand that risk is part of their business and take a deliberate and knowledgeable approach to manage risks. Managing risk in marketing agricultural products involves information, objectivity, attitude, and skill. To develop a successful market strategy corn growers should:

Know what level of risk they are comfortable with. Are you financially able to “shoot for the top price” and miss? Can you afford to store a crop hoping for a price increase or are cash flows needs such that you must sell at harvest? Does a marketing decision keep you awake at night? These are some of the questions that must be answered to determine what risk growers can take and which ones they need to pass on. Remember, if a grower is holding grain without a hedge, then they are accepting a risk.

Growers should be willing to develop marketing skills. Successful market planners are constantly learning new skills such as using market options or basis contracts. They take advantage of marketing professionals who help them find ways of dealing with market risk.

Develop an integrated marketing approach. Marketing decisions should be made based on their impact on long-term profitability not short term “windfalls”. The impact of marketing decisions on production, financial, and human resources should be accounted for.

Managing market risk begins with a marketing plan. This plan should be based on the goals of your business, the level of profit needed, and your ability to accept risk. The three keys to a successful marketing plan for corn are:

  1. An accurate account of production costs for a bushel of corn.
  2. An understanding of the appropriate marketing and risk management tools available.
  3. A grain marketing decision plan.

Calculating Production Costs

The simplest way to know the cost of producing a bushel of corn is to develop an operating budget. Examples of corn operating budgets for no-till, conventional till, and silage producers are presented in Tables 9-1, 9-2, and 9-3. Substitute your actual costs for the examples printed on these sheets. If you don’t know your cost for some of the items listed, you can use the figures given. Once you have calculated your cost of production, use your expected or actual yield to calculate a cost per bushel. This will be the figure that forms the base price that you need to obtain to break even. Your basic marketing goal will be to find a price that will allow you to recover your cost and make a profit. Make copies of your corn budget and place them at locations (near the phone, etc.) from which you can quickly consult the figures from time to time as you see opportunities to sell.


Table 9-1. Revenue-per-acre for no-till corn production in the piedmont and coastal plain.
Operating Inputs Price Quantity Cost Your Cost
Lime tons 27.00 0.33 8.99 .
Seed Corn 1000 0.90 28000 25.20 .
10-10-10 dry Cwt 6.75 5.0 33.75 .
Herb. preplant acre 28.80 1.0 28.80 .
30% N sol. Cwt 6.85 4.272 29.96 .
Herbicide post acre 21.48 1.0 37.96 .
Insecticide acre 37.96 1.0 37.96 .
Burndown I acre 12.80 1.0 12.80 .
Burndown II acre 12.80 1.0 12.80 .
Interest on capital $ 0.095 98.924 9.40 .
Machinery Labor Hr 8.5 2.508 21.32 .
Machinery expense $ . . 37.72 .
Total Operating Costs 279.48 .
Fixed Costs . . Amount Cost Your Cost
Interest on Machinery 10.25% 249.16 25.54 .
Depreciation, Taxes, Insurance . . 35.22 .
Total Operating Costs 60.76 .
Production Income Price Quantity Income Your Income
Corn bu 2.50 120.0 300.00 .
Returns Above Operating Costs 20.52 .
Returns Above All Costs -40.24 .
Operating Cost per Bushel of Corn 2.32 .
Total Cost of Bushel of Corn 2.83 .

Table 9-2. Revenue per acre for no-till corn silage production in the piedmont.
Operating Costs Price Quantity Cost Your Costs
Lime tons 30.00 0.33 9.99 .
Seed Corn 1000 0.92 26,500 24.38 .
0-0-60 dry Cwt 8.10 2.5 20.25 .
Spreading Chg. Cwt 1.00 2.5 2.50 .
Herbicide Preplant acre 21.00 1.0 21.00 .
10-34-0 dry Cwt 11.85 0.62 7.35 .
30% N sol. Cwt 6.60 4.5 29.70 .
Herbicide post acre 18.15 1.0 18.15 .
Insecticide acre 10.60 1.0 10.60 .
Herbicide Post #2 acre 1.56 1.0 1.56 .
Interest on Capital $ 0.10 68.673 6.87 .
Machinery Labor hr. 6.00 4.017 24.10 .
Total Operating Costs 214.33 .
Fixed Costs . . Amount Cost Your Cost
Interest on Machinery 10.25% 313.40 31.34 .
Depreciation, Taxes, Insurance . . 36.23 .
Total Fixed Costs 67.57 .
Production Income Price Quantity Income Your Income
Corn Silage (dry wt.) tons . 5.5 . .
Total Cost per ton of Corn Silage 51.25 .
Total Cost per pound of TDN 0.0377 .

Table 9-3. Revenue-per-acre for conventional-tilled corn in 30-inch rows in the tidewater region.
Operating Costs Price Quantity Cost Your Costs
Lime tons 27.00 0.5 13.50 .
Seed Corn 1000 0.90 33,000 29.70 .
10-10-10 dry Cwt 6.75 5.0 33.75 .
Spreading Chg. Cwt 1.00 5.0 5.00 .
Herbicide Preplant acre 29.94 1.0 29.94 .
30% N sol. Cwt 6.85 4.272 29.26 .
Herbicide post acre 21.48 1.0 21.48 .
Insecticide acre 37.96 1.0 37.96 .
Interest on Capital $ 0.095 91.919 8.73 .
Machinery Labor hr. 8.5 2.268 19.28 .
Machinery Expense $ . . 35.08 .
Total Operating Costs 255.68 .
Fixed Costs . . Amount Cost Your Cost
Interest on Machinery 10.25% 218.31 22.38 .
Depreciation, Taxes, Insurance . . 31.36 .
Total Fixed Costs 53.73 .
Production Income Price Quantity Income Your Income
Corn bu 2.37 140.00 331.80 .
Returns Above Operating Costs 76.12 .
Returns Above All Costs 22.38 .
Operating Cost per Bushel of Corn 1.82 .
Total Cost per Bushel of Corn 2.21 .

Understanding Marketing Tools

Learning about the full range of price risk management tools will allows corn growers to become a better marketers and risk managers. Selecting the right tool to use at the right time will not only reduce risk, it could increase profit. The following are a basic overview of the more commonly used strategies and when to use each. Consult your local marketing professional or extension marketing specialist for more information.

Storage (with no protection)

Storage is a way of avoiding seasonally low prices. When prices are below the level anticipated in the marketing plan, storage may be justified, assuming the grower has adequate financial resources.

Cash Sale

When prices are favorable and at levels anticipated in the marketing plan, a direct cash sale is warranted.

Deferred Payment Contracts

Deferred payment contracts allow for the current pricing and delivery of the crop, but can delay the receipt of payment. They are often used as an income management tool for tax planning purposes.

Fixed Price Contract for Deferred Delivery

This contract allows producers to establish a price for later delivery. A fixed price contract, also known as a cash forward contract, may allow a grower to schedule deliveries at times of the year that better fits with labor, grain quality, and logistics. These contracts often work well when crops are large, when storage is tight, or when the market price reaches the objective in your marketing plan.

Basis Contract

Basis is the difference between the local cash price and a futures contract price for the same date. Basis is typically more stable and predictable than either the underlying futures contract or the local cash price. However, basis does change in response to local supply and demand factors. A basis contract allows you to fix the basis, but allows the final cash selling price to be determined at a later date by subtracting the fixed basis from the futures price. This strategy works well when the basis is strong (cash prices are high relative to futures) and there is some potential for an increase in futures prices.

Deferred or Delayed Price Contract

A deferred or delayed price contract transfers title of a crop to the buyer at delivery, but allows the seller to set the price later. It is commonly used when storage is tight. At these times, the local elevator wants to move more grain into the marketing channel, but the seller may not be satisfied with current prices.

Minimum Price Contract

A minimum price contract establishes a floor price for the duration of the contract. The floor price is typically several cents below the cash price at the beginning of the contract. A producer could net less with a minimum price contract than with a fixed price contract if prices fall, but will benefit from a rise in market prices. This contract eliminates much downside price risk.

Hedge-to-Arrive (HTA) Contract

This contract has risk management properties similar to a short futures market position. It is the opposite of a basis contract. It permits the seller to set the futures price level by the delivery date, but the basis is determined later. The seller is responsible for delivering the contracted amount on the delivery date.

Short Futures Hedge

Selling futures contracts to protect the value of grain or livestock in inventory or the value of expected production is a short futures hedge. A short futures hedge reduces downside price risk. On the other hand, it also reduces the ability to capture upside price movements.

Put Option Purchase

This tool is similar to a minimum price contract. It sets a floor on the crop or livestock price throughout the life of the contract. If prices rise during the period, the seller can capture upside price gains.

Contracted Production

Many variations of this type of contractual arrangement exist. Historically, production contracts have been used for specialty crops, poultry, and livestock. Purchasers have been willing to offer such contracts to fulfill the need for highly specific agricultural products. Recently, contracted production has been offered on an increasingly broader range of crops and livestock. Contract production reduces flexibility and the opportunity to capture upside price potential. But, it assures a relatively reliable cash flow.

Developing a Corn Marketing Decision Plan

Following is a step-by-step process for making a corn marketing decision.

STEP 1. Write down your marketing goals. Your goals should be simple, such as: “Make $0.20 over my cost of production.” or “Increase profit by selling on a narrow basis at least three different times of the year.” Make sure your goals are realistic and will result in an improvement in overall profit. For instance, a goal of selling at the market high is probably not realistic since you won’t know when the high is until it is past. Here are a few simple rules to use in setting goals for marketing corn.

Never sell more than 50% of your crop until you know that you will have something to harvest
Never hedge 100% of a growing crop.
Don’t sell more than 25% of your crop at any one time.
Don’t hedge more than 1/3 of your crop before it is planted.
Don’t sell more than 50% of your crop in any one quarter of the year unless you have strong reasons for doing so.

A good set of goals should outline how much you are willing to sell at any one time and a price level that you would like to achieve, such as: “sell 25% at $2.75, sell 50% at $2.90, and sell 75% at $3.10”. These type of goals provide the basis for decisions you will make as marketing opportunities present themselves.

STEP 2. Once you have a set of marketing goals you are ready to consider your options in light of corn prices and market forces. If you grow or own corn, you are in one of the following situations. These are:

Sell now
Hedge for latter sale or to retain ownership of sold grain.
Store (no hedge protection) for latter sale
Store (with hedge protection) for latter sale

There are various alternatives to use within each of these categories (see market tools above), but these four basic options are always present.

STEP 3. With your marketing goals in mind, the first question that you should consider is to sell grain now or wait. For most producers this is the beginning and end of the process. Their lack of understanding of the marketing system puts the entire load of their marketing program on one big decision - to sell or not to sell. In a good marketing plan, the decision to sell grain is only the beginning of the process. Your decision to execute a sale should be based on the following:

Your risk attitude - can you afford to take a chance on price changes (up or down) while holding grain. Remember if you are holding grain without a hedge, you are assuming all risk.

Market fundamentals - Fundamentals are supply and demand. When supply is high and demand is low, corn prices are low. When supply is low and demand is high, corn prices are high. Keep track of market reports and learn to use fundamentals to aid your decision process. For instance, when farmers say they are not going to plant corn this year because of low prices, now may be the best time to plant corn because next year there is bound to be a decline in corn supply.

Cycles and Seasonals - Corn prices go through short and long-term cycles. For instance, corn prices tend to be lowest in October when the bulk of the harvest is being done in the midwest and highest in late July and August when livestock feeders run low on inventory. Corn also has a very reliable 3 ½-year cycle with the last major high coming in April of 1996. Learn the cycles and use them to your advantage.

Technical analysis - Technical analysis is your sell trigger. While the fundamentals and cycles show you the long-term patterns, technicals allow you to see the short-term trend. Technical analysis is based on trend charts or bar charts showing daily market high, low, and closing. By looking at the monthly and weekly record a corn marketer can see the market trend and learn to tell when it will change. Talk to your extension marketing specialist about learning to read bar charts. He can help you get acquainted with the signals they provide.

Cost Analysis - Cost analysis helps you determine whether or not you can afford to be wrong. If you are a young farmer with high cash rent and large debt, you can’t afford to turn down a small profit while taking a chance that the market will continue to climb. If you are wrong, you take the chance of losing the farm. On the other hand, if you have money to burn, then you can afford to take a chance.

Psychology - Emotion and common sense are usually dead opposites. Learn to put emotion aside and focus on common sense. Because most people let emotion dictate their decision process, it is often helpful to take the contrary opinion when compared to the rest of the crowd.

The following exercise is helpful in using the above factors in deciding when to sell and how much to sell. Circle the number on the chart that matches your insight into that market factor and then add your scores. Use the second table to find out how much to sell.


Market Factors Inclination to Sell Your Score
Weak ---> Strong
Risk Analysis 1 2 3 4 5 6 7 8 9 10 .
Fundamentals 1 2 3 4 5 6 7 8 9 10 .
Season/Cycle 1 2 3 4 5 6 7 8 9 10 .
Tech. Analysis 1 2 3 4 5 6 7 8 9 10 .
Cost Analysis 1 2 3 4 5 6 7 8 9 10 .
Psychological* 1 2 3 4 5 6 7 8 9 10 .
Total Score =

*Common sense tells you to sell if psychological score equals 10


IF SCORE IS...
0-19 20-29 30-39 40-49 50-59 60
Sell this amount of growing crop 0 0-15 15-30 30-40 40-50 50+
Sell this amount of stored crop 0 0-15 15-35 35-65 65-90 100

STEP 4. Once a decision has been made that prices warrant a consideration to sell corn, the next decision is whether to sell cash (or forward contract) or use the futures market. This decision can frequently be worth $0.25 or more. The key is to know the market basis for your area. Basis is the difference between Chicago futures and your local cash price. Your extension marketing specialist can tell you the “normal” basis for your area. When the basis is better than normal, the market is telling you it needs corn. In this situation, selling cash or using a basis contract is the best option. However, if the basis is weak, then the market is telling you it doesn’t need the corn right now. In this case you should sell by using a futures contract or a contract that leaves the basis open. The following guide should help in making a decision on cash or futures sale.


Futures Opportunity Cash Opportunity
_____Futures Month $__________ Current Cash Prices for similar
Delivery date
$__________
Minus Basis $__________
= Projected price $__________

A. Cash sales are currently offered at $__________ over nearby futures. “Normal” basis for this season is $_____ to $_______.

B. Forward cash sales are currently being offered for $_______ for ______ delivery. “Normal” basis for that delivery month is $_______.

STEP 5. The final decision is when to deliver the grain. This decision is based on the market signals such as the difference in futures prices between the nearby months and the long-term market. If the basis is weak and future months offer the opportunity to pay for storing the grain, then selling in the future is a good decision. However, if the price analysis indicates that the future months don’t offer you enough to cover storage costs, then the nearby options are the best bet. The following decision budget will help you decide on which option month to use in pricing your grain.

Determining What Market Period to Use

Market options being compared are ______(month) and ______.

FIRST MONTH

__________(month) $__________(price)

Less estimated basis _________

local price for Month: A. _______

SECOND MONTH

__________(month) $__________(price)

Less estimated basis _________

local price for Month: B. ________
>Potential gross return to later delivery

(line B minus line A) C. __________

Cost to hold until _____
Interest ________
Shrink ________
Drying cost ________
Storage cost ________
D. Total ________

Potential Net Return to Later Delivery
(Line C minus Line D) $_________

Conclusions

If you follow the process outlined above in developing a market plan and executing it, you should consistently realize a higher return on your investment in corn production. In summary, keep the following points in mind.

  1. Know your ability to accept market risk
  2. Know your production costs.
  3. Develop a marketing plan with specific goals
  4. Develop a trading discipline
  5. Don’t gun for highs or lows, set a goal and stick to it.

Authors

Extension Economics Specialist
Agricultural & Resource Economics
Professor and Extension Specialist, Corn/Soybeans/Small Grains
Crop and Soil Sciences

Publication date: Jan. 1, 2003
AG-590

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