PURDUE COOPERATIVE EXTENSION SERVICE September 18 Ag Outlook Update PURDUE COOPERATIVE EXTENSION SERVICE March 31, 2008

Rapid World Economic Growth September 18 Rapid World Economic Growth Ethanol Weak Dollar

08 Crop 07 Crop

Weakest $ Since 95-96

------------- Million Bushels ------------------ Stocks Situation Stocks March 1 Expectation ------------- Million Bushels ------------------ Corn-Bullish 6,859 7,078 -219 Lower Soybeans-Bearish 1,428 1,355 + 73 higher Wheat-Bearish 710 666 + 44 higher

2007 2008: Corn +19% - 8% Beans - 15% + 18% Wheat + 6% + 6% Rotation Comfort Zone

  2008-07 2008 vs. 07 1,000 acres  Acreage % 06 07 08 Change Corn 78,327 93,600 86,014 -7,586 -8.1% Soybeans 75,522 63,631 74,793 11,162 17.5% Wheat 57,344 60,433 63,803 3,370 5.6% Sorghum 6,522 7,718 7,415 -303 -3.9% Cotton 15,274 10,830 9,390 -1,440 -13.3% Oats 4,168 3,760 3,420 -340 -9.0% Barley 3,452 4,020 4,147 127 3.2% Rice 2,838 2,761 2,770 9 0.3% Sunflower 1,950 2,068 2,153 85 4.1% Sum 9 Major 245,397 248,821 253,905 5,084 2.0%

2007 2008: Corn +18% - 12 Beans - 18% + 17% Wheat - 11% + 31%

Weather Wet Top Soils Wet Sub-Soils

April 5- April 9 Warm Wet in East

April 7 to April 13 Cool Wet

June/July/August Warm Dry WCB

Estimated Variable Production Costs September 18 Estimated Variable Production Costs The estimated production costs for all the crops increased, driven by higher fertilizer, seed, fuel, and interest expenses. Purdue ID-166

2008 Estimated Crop Budget:   Indiana: March 3, 2008 Prices Corn Soybeans Wheat Harvest Futures $5.65 $14.20 $10.00 Expected Basis -0.45 -0.75 -1.15 Expected Cash Price $5.20 $13.45 $8.85 Estimated Yield/Acre and Returns/Acre Above Variable Costs Wheat/DC Bns Land Quality bu./acre $/acre Low 125.0 $303 39.0 $356 62.0 $386 $557 Average 157.0 $436 49.0 $477 70.0 $441 $686 High 188.0 $588 59.0 $599 84.0 $537 $855 Budget: Purdue Id-166

2008 Estimated Crop Budget:   Indiana: March 31, 2008 Prices Corn Soybeans Wheat  Prem. Corn Harvest Futures $5.80 $10.90 $9.36  +$90/ac. Expected Basis -0.60 -1.10 -2.00  +$138/ac. Expected Cash Price $5.20 $9.80 $7.36  +$205/ac Estimated Yield/Acre and Returns/Acre Above Variable Costs Wheat/DC Bns Land Quality bu./acre $/acre Low 125.0 $303 39.0 $213 62.0 $293 $381 Average 157.0 $436 49.0 $298 70.0 $336 $475 High 188.0 $588 59.0 $383 84.0 $412 $602 Budget: Purdue Id-166

2008 Estimated Crop Budget: Indiana: Change Since March 1   Prices Corn Soybeans Wheat Harvest Futures +.15 -$3.30 -$.64 Expected Basis -0.15 -$.35 -.85 Expected Cash Price $0.00 -$3.65 -$1.49 Estimated Yield/Acre and Returns/Acre Above Variable Costs Corn $/ac Land Quality $/acre Change Low $303 $213 -$143 $293 -$93 Average $436 $298 -$179 $336 -$105 High $588 $383 -$216 $412 -$125 Budget: Purdue Id-166

Corn futures are trending up, while Bean futures are trending down.

Corn: USDA 3/31/2008 Purdue 03/04 04/05 05/06 06/07 07/08 08/09   Corn: USDA 3/31/2008 Purdue 03/04 04/05 05/06 06/07 07/08 08/09 Million Bushels Carryin 1,087 958 2,114 1,967 1,304 1,258 Production 10,089 11,807 11,114 10,535 13,074 12,160 Total Supply 11,190 12,776 13,237 12,515 14,393 13,433 Feed & Residual 5,798 6,162 6,142 5,600 6,130 5,300 FSI Non-Fuel 1,369 1,363 1,378 1,371 1,355 1,360 FSI Fuel (Ethanol) 1,168 1,323 1,603 2,115 3,200 3,800 Export 1,897 1,814 2,147 2,125 2,450 2,000 Total Use 10,232 10,662 11,270 11,211 13,135 12,460 Ending Stocks 973 US Farm Price $2.42 $2.06 $2.00 $3.04 $3.85-$4.35 $4.25-$6.25 $4.15 $5.25

March 31 Purdue 03/04 04/05 05/06 06/07 07/08 08/09 Million Bushels   Soybeans: USDA March 31 Purdue 03/04 04/05 05/06 06/07 07/08 08/09 Million Bushels Carry in 178 112 256 449 574 200 Production 2,454 3,124 3,063 3,188 2,585 3,115 Total Supply 2,638 3,242 3,323 3,647 3,165 3,321 Seed & Residual 111 195 187 148 95 170 Crush 1,530 1,696 1,739 1,806 1,845 1,825 Exports 885 1,095 948 1,118 1,025 Total Use 2,526 2,986 2,874 3,074 2,965 3,020 Ending Stock 301 Farm Price $7.34 $5.74 $5.66 $6.43 $9.60-$10.40 $8.00-$11.00 $10.00 $9.50

Wheat: USDA 3/31/08 Purdue 03/04 04/05 05/06 06/07 07/08 08/09 September 18   Wheat: USDA 3/31/08 Purdue 03/04 04/05 05/06 06/07 07/08 08/09 Million Bushels Carry in 492 546 540 571 456 272 Production 2,345 2,158 2,105 1,812 2,067 2,266 Total Supply 2,904 2,776 2,727 2,505 2,613 2,638 Feed & Residual 212 187 154 125 70 130 Other Domestic 987 986 993 1,015 1,036 1,035 Exports 1,159 1,063 1,009 909 1,235 1,150 Total Use 2,358 2,236 2,156 2,049 2,341 2,315 End Stocks 323 Farm Price $3.40 $3.42 $4.26 $6.50-$6.80 $6.25-$8.25 $6.65 $7.25

New Crop Pricing Alternatives Pricing strategies that tend to work well in the Pre-harvest period include: Forward cash contracting Selling futures to hedge Buying put options, and Selling cash on a forward contract and also buying new crop call options (this is called a synthetic put)

Why Some Elevators Are Not Offering New-Crop Contracts! Net elevator margins only 2-3 cents per bushel Buy cash from farmers and sell NEW-Crop Futures High potential costs of margin money Potential of some farmers defaulting on contracts End users hesitant to buy new crop contracts When Futures rose, cash prices did not move in correspondence with the futures. Why? High open interest in futures? Failure of convergence at maturity for wheat and soybeans Grain elevator manager faces huge basis uncertainty

New Crop Pricing Alternatives But what if you can’t price at your elevator? Do Nothing Use your own Broker/Advisor and: Sell Futures to hedge Basis risk and credit risk from margin calls Buy put options Basis risk and expensive Buy put options and sell calls Basis risk and credit risk from margin on calls

Basis Uncertainty (Risk) Basis widens with higher: Transportation costs Interest costs Cost of grain transactions Lack of new crop bids from end users like grain processors, foreign buyers, and the feed industry Volatile futures prices with lack of convergence of cash and futures, especially in wheat and soybeans Instability and uncertainty for what situations will unfold in 2008/09.

Futures Will Move Up Down Basis Will Get Better Do no pricing, wait for improvement -Hedge with futures -Buy put options -Hedge-to-Arrive at elevator Worse -Basis contract. -Sell cash and buy futures. -Sell cash and buy a call. Price now

Recommended Strategies

September 18 Now You Know Which Direction To Go In 2008!