Will corn and beans set new records?

AMES, Iowa – Old and new-crop corn and soybean prices dropped sharply from mid-July, reflecting expectations of even larger U.S. corn and soybean yields than projected earlier in the month by USDA.

Reports of much-improved foreign crop prospects relative to last year’s low yields also pressured prices.

For old-crop soybean prices, pressure has come from indications that supplies will not show the extreme tightness in August that had been anticipated.

This change in expectations was reflected in a $1 per bushel or more decline in the basis at some locations along with the decline in soybean futures prices.

Bean supply tight. Mexican replacement of U.S. bean purchases with supplies from South America will modestly boost supplies available to U.S. crushers.

Earlier-than-normal crop development in Mississippi and Louisiana created expectations that 12 to 18 million bushels of new-crop production will be harvested before the end of August. If so, those supplies can be crushed in the old-crop marketing year, helping to relieve tightness in late-summer supplies.

Other factors pressuring cash bean prices included widespread expectations that last year’s soybean crop was modestly under-estimated and indications that Aug. 31 soybean stocks may drop below the 100 million bushel level previously considered an absolute lower limit for the carryover.

Volatility remains. These developments triggered a widespread view that the top is behind us for both old-crop soybean futures and the basis.

Even so, the old-crop soybean supply situation is tight.

Meal supplies will likely be substantially tighter than a year earlier for the next several weeks, and cash bean and meal prices will remain volatile through August.

Corn yield expectations. Old-crop corn and new-crop corn and soybean prices will be directed by U.S. and foreign crop conditions for the next six weeks.

Harvest-delivery corn prices at some central and north central Iowa elevators in the last few days have been only 4 to 8 cents above local loan rates. New-crop soybean bids, however, have been 30 to 40 cents above the loan rate.

Major chart support areas have been broken and the loan rates appear to be the next major support areas. The approximate Chicago equivalent of loan rate is $2.15 to $2.20 for December corn futures.

The corn market appears to reflect expectations that the U.S. corn crop will be 10.75 to 10.85 billion bushels, with the U.S. average yield 146.5 to 147.8 bushels per acre. Last year’s yield was a record 142.2 bushels per acre.

Export picture. Prices also appear to reflect expectations that 2004-05 corn exports will be 150 to 175 million bushels below the latest official projections. New-crop corn export sales are only about one-third as large as at this time in 1995 and about one-fourth as large as in late July 1996.

In 1995 at this time exports for the coming year were expected to be about 1.9 billion bushels. In July 1996, corn exports for the coming year were expected to be 2.1 billion bushels. USDA projects next season’s U.S. corn exports at 2.1 billion bushels.

Won’t hit 11 billion. While a possible 11 billion bushel corn crop has been mentioned in some news stories, average trader expectations probably are moderately lower. An 11 billion bushel U.S. corn crop would require a national average yield of nearly 150 bushels per acre, about 5 percent above the long-run trend yield.

An 11 billion bushel crop would likely push anticipated Aug. 31 carryover stocks up to around 1.5 billion bushels or nearly 15 percent of annual use.

Weather watch. To reach a U.S. crop of 10.75 to 10.85 billion bushels, weather will have to be very favorable across the entire Corn Belt through harvest. While a crop of that size is possible, it is by no means certain.

An extended period of dry weather across the western half of the Corn Belt and temperatures in the mid-to-upper 90s from Kansas, Nebraska and western Iowa to South Dakota would bring modest strength to cash and new-crop corn prices.

Slow development of the crop in Minnesota, Wisconsin, Michigan, and Ohio due to cool weather could make part of the crop in those states vulnerable to frost damage.

Soybean yields. For soybeans, the grain trade appears to be expecting a U.S. average yield of about 40 bushels per acre, with production near 3.0 billion bushels. A soybean yield at that level would be nearly 20 percent higher than last year, with the U.S. crop up about 580 million bushels.

A crop of that size would have the potential to push harvest time soybean prices below the loan rate. The Chicago equivalent of the loan rate is about $5.35 to $5.40 for November soybeans.

Last year’s response of soybeans to an extremely dry August is a caution sign for new-crop bean prices. At this time a year ago, soybean crop conditions looked to be below average in parts of the eastern Corn Belt and South. Lack of rain in August plus widespread aphid problems sharply reduced the U.S. average yield.

Marketing considerations. With new-crop corn prices approaching loan levels, the incentive for aggressive sales has been greatly reduced.

Meanwhile, corn futures prices have generated a significant 19-cent “carry” (premium of July 2005 futures vs. December 2004 contract).

If the crop is as large as currently expected, the carry and basis together would signal to those with on-farm storage that this is a year to strongly consider storing, and selling for May- June delivery with futures or a non-roll HTA (also called “futures only” or “basis not established”) contract.

With the potential for modest price volatility in the next few weeks, offer contracts may be useful for new-crop and remaining old-crop corn and soybeans.

So far, the soybean “carry” at 21 cents from November to July and 14 cents to March 2005 would provide less incentive for storage hedges because of higher interest costs.

(The author is an ag economist at Iowa State University.)