US Crop Production, 2003
Grain
Corn
Soybeans
Wheat
Sorghum
Barley
Oats
Mil. Ac
Mil. bu
71.1
72.3
52.8
7.8
4.7
2.2
10,114
2,418
2,336
411
276
145
Corn 2002-03
Carryover
10%
Food/Seed/
Industrial
22%
Feed/Res
53%
Exports
15%
Soybeans 2002-03
Carryover
6%
Seed/feed/res.
4%
Exports
35%
Crush
55%
Wheat 2002-03
Carryover
20%
Food
37%
Exports
35%
Seed
3%
Feed/Res.
5%
Grain Marketing Channel
 Local
elevators
– Grading, drying, some storage
– First pricing point
– Some processing (particularly feed)
 Subterminal
elevators
– Concentrate grain for shipment
– Limited storage
– Purchase from local elevators
Grain Marketing Channel
 Terminal
Elevators
– Processing
– Exports
 Export
terminal elevators
– Ocean port or seaway
– Limited storage
Grain Pricing
 Central
price discovery point for grain is
the commodity futures markets.
 Local markets price on a basis to the futures
 Basis accounts for
– Location: transportation and local supply and
demand conditions
– Time: storage cost relative to a futures delivery
– Form: type of grain, quality and condition
Grain Pricing
 Global
supply and demand factor in
through the futures market daily
 Local prices based on futures through a
basis unique to each market
 Basis within a market impacted by local
conditions
Grain Pricing
 Central
Iowa corn price and basis the
last week of Nov. 1989-98
Price
Basis
–
–
–
–
Average
Minimum
Maximum
Range
$2.27
$1.88
$2.93
$1.05
-$.42
-$.32
-$.53
$.21
Storage as a strategy
 Grain
must be dry and stay in condition
 On farm or off farm
 Add time utility
Storage advantages
 Avoid
harvest time low prices
 Avoid lines at elevator
 Increases marketing period
 Helps management of income for taxes
 Same storage cost for longer storage
 Allows quality control for livestock feed
Storage Disadvantages
 Extra
handling of grain
 Demands extra attention to marketing
 Risk of grain going out of condition
 Added investment and tax (on farm)
 Must finance storage
Drying and conditioning grain
 Corn
harvested at higher moisture than
can be safety stored
– No. 2 corn is 15% moisture
– Store at 13.5% moisture or less
– Harvest losses increase as moisture declines
Storage and drying costs
 Harvest
mid-October at 19.5% moisture
 Store until mid-May and sell
Harvest price (15% moisture)
$2.30
Extra dry @ $.015/point x 6pts
+0.09
Storage (on-farm) $.01/month
+0.07
Interest @ 9.0% x 7/12 x $2.30
+0.12
May price needed to breakeven
$2.58
Seasonal Price Index for Corn and Soybeans
108%
106%
104%
102%
100%
98%
96%
94%
92%
Corn
Soybeans
90%
Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
Unhedged Storage Return, Beans, On-farm,
1979-80 Through 1997-98, N.C. Ia.
80%
$ Per Bu., Net
0.15
0.10
0.05
0.00
(0.05)
(0.10)
(0.15)
60%
40%
1
2
3
4
5
6
7
Net Return per bu.
20%
%Of Years w/Pos.
Returns
0%
8
Months of Storage
9
10
Cents/ Bu. Net
Unhedged Storage Return, Corn, On-farm,
1979-80 Through 1997-98, N. C. Ia.
15
10
5
0
-5
-10
-15
60%
50%
40%
30%
20%
10%
0%
Avg. Gain/Loss
1
2
% of Yrs w/Pos.
3 Ret.4 5 6 7
Months of Storage
8
9 10
Storage: Times of Risk
& Opportunity
• Opportunity: U.S. Planting Season
• High Risk:
Late February-early March
Last-Half July Until U.S. Harvest
• Strategy: Sell Before Others Sell
• Plan to Cover Cash Needs Ahead With
Cash or Contract Sale, or Futures
Other Cash Grain Tools
 Marketing
loan
 Loan Deficiency Payment (LDP)
– Can use one or the other but not both
Marketing Loan
 USDA program
started in 1996
 16 crops including corn and soybeans
 Designed to help farmers market their crop
throughout the year without interfering with
basic supply and demand forces
 Loan rate set by USDA
 Grain serves a collateral
 Nine month maximum loan
Posted County Price (PCP)
 Is
calculated daily for each county by
Farm Service Agency of the USDA
 Based the higher of the Kansas City or
New Orleans Gulf price
 Accounts for transportation back to
county
Marketing Loan
 Repaying
the loan
– Prices > loan rate + accrued interest
» repay loan + interest
» sell the grain at the higher price
– Price < loan rate + accrued interest
» repay loan at the PCP
» keep difference (loan rate – PCP)
» you still own the grain
– Nonrecourse
» Deliver the grain and keep the loan payment
Loan deficiency payment
Difference between the loan rate and PCP
 LDP is not repaid
 Must have ownership of grain
 Coordinate paperwork with FSA office
 Unless grain is sold or priced at the time the LDP is
collected the farmer is speculating on the price of
the grain
 High percent of 1999 corn and beans have taken the
LDP

Marketing Loan or LDP
 ML is
a free price floor (put option)
– Guaranteed minimum price (loan rate)
– Sell at higher price less storage and interest
 LDP has
price risk
– Hope for falling prices to maximize LDP
– Then hope for rising prices to sell grain
– Problem arise if markets fall after taking LDP