Maintaining Profitability in Challenging Times Crop Advantage Series January 2010 Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911 1

Iowa Corn Prices vs. Costs Early numbers from Mike Duffy show corn costs backing down to 2008 crop year levels.

Iowa Soybean Prices vs. Costs Soybean costs also fall, but hold above 2008 crop year levels.

U.S. Corn Supply and Use 2007 2008 2009 Area Planted (mil. acres) 93.5 86.0 86.5 Yield (bu./acre) 150.7 153.9 165.2 Production (mil. bu.) 13,038 12,092 13,151 Beg. Stocks 1,304 1,624 1,673 Imports 20 14 10 Total Supply 14,362 13,729 14,834 Feed & Residual 5,913 5,246 5,550 Ethanol 3,049 3,677 4,200 Food, Seed, & Other 1,338 1,276 1,270 Exports 2,437 1,858 2,050 Total Use 12,737 12,056 13,070 Ending Stocks 1,764 Season-Average Price ($/bu.) 4.20 4.06 3.70 USDA’s 2009 projections based on conditions around Dec. 1. It would be the 2nd largest corn crop, just behind 2007. Demand is projected to recover across the board (higher feed, ethanol, and export demand), but we may want to watch feed demand as this increase is likely harvest loss (not feed use). Ethanol demand is about 100 million bushels above mandate levels. Export demand is being helped with some smaller customers buying early. Ending stocks currently shown as flat, but will likely decline with the additional harvest losses. Current price estimate of $3.55/bushel is well below market levels ($3.75-3.80). Source: USDA 4 4

U.S. Soybean Supply and Use 2007 2008 2009 Area Planted (mil. acres) 64.7 75.7 77.5 Yield (bu./acre) 41.7 39.7 44.0 Production (mil. bu.) 2,677 2,967 3,361 Beg. Stocks 574 205 138 Imports 10 13 8 Total Supply 3,261 3,185 3,507 Crush 1,803 1,662 1,710 Seed & Residual 93 101 177 Exports 1,159 1,283 1,375 Total Use 3,056 3,047 3,262 Ending Stocks 245 Season-Average Price ($/bu.) 10.10 9.97 9.65 USDA’s 2009 projections based on conditions around Dec. 1. It would be the largest soybean crop. Crush demand is projected to recover slightly, based on soybean meal export demand. Export demand has remained strong as China continues to buy and other markets have started to pick up. Longer-term, we will see increased export competition from South America. Ending stocks are rebounding, but still very tight. Current price estimate of $9.50/bushel is well below market levels ($9.75-9.85). Source: USDA 5 5

Storage Issues Source: Hurburgh and Elmore, ICM News, 10/15/09 Storage and quality issues are concerns. Two wet crops in a row, increased drying costs. Hail damage in some areas leading to mold problems. Source: Hurburgh and Elmore, ICM News, 10/15/09 6 6

Soybeans – Argentina & Brazil Area has shifted strongly to soybeans. And production is expected to rebound from last year’s drought. So we will have a lot more competition on the export front in a few months as their harvest kicks in. Source: USDA 7 7

Smaller Livestock Numbers Numbers continue to fall. Cattle showed a slight increase a couple of months ago due to the big drop in numbers from fall 2008 (percentages are changes from the previous year). Hogs and dairy cattle are off by 2 percent. Poultry has worked its way up to zero. Poultry is the 1st sector where we expect to see growth. Source: USDA, NASS, various reports

Renewable Fuels Standard (RFS) The renewable fuels blueprint for the next 13 years. Corn-grain based ethanol is a conventional biofuel. Conventional biofuels build to 15 billion gallons by 2015, after that cellulosic takes off to 16 billion gallons by 2022. 9

Crude Oil Prices Sources: EIA, NYMEX Crude oil is working its way back up, providing room for higher ethanol and crop prices. Sources: EIA, NYMEX

Corn Futures Trade Source: CFTC Another factor is a recent return of the funds in the market. Source: CFTC 11 11

Corn 1990 - 2006 The relationship between corn prices and ending stocks used to be fairly stable, but…

Corn The next few years have changed that relationship. Crop prices are now much more responsive to tighter stocks.

Iowa Crop Basis The corn basis has been around its average. Tight soybean stocks and strong export demand led to a flip in the soybean basis. As harvest progress picked up, weakness built in. I expect basis levels will tighten as we work through this winter and spring, back towards average levels (but not quite reaching the averages).

Projected 2009 Season-Average Corn Price The futures market was more bearish over most of the growing season, but has flipped to the bullish side since October. The futures market has consistently pointed to a 2009/10 season-average price of $3.70 to 3.80 for the past month.

Projected 2009 Season-Average Soy Price As with corn, the futures market has flipped to the bullish side since October. The futures market has consistently pointed to a 2009/10 season-average price of $9.50 to 10.00 for the past month, mostly in the $9.80 range.

Corn Futures Source: CBOT, 1/12/10 Fairly good carry in the corn market through July. Dec. 2010 futures point to higher prices for the 2010 crop and higher insurance prices this spring. Source: CBOT, 1/12/10

Pricing Dec. 2010 Corn Sources: CBOT, ISU Extension

Soybean Futures Source: CBOT, 1/12/10 The soybean market has built in a little carry through July, but prices fall after that. The fall is partially based on the upcoming South American crop. Futures for the 2010 crop are hanging in the $10 range. Soybean crop insurance prices should be higher for 2010. Source: CBOT, 1/12/10

Pricing Nov. 2010 Soybeans Sources: CBOT, ISU Extension

Seasonal Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2008

Decision Chart Futures Increase Basis Contract Sell Cash and Buy Futures Call Options Minimum Price Contract, Fixed Basis Store & Wait to Price Delayed Price Contract Minimum Price Contract, Variable Basis Basis Weakens Expected Change Basis Strengthens Hedge Hedge to Arrive Put Options Cash Sale Forward Contract Futures Decrease

Iowa Corn Prices vs. Costs Early numbers from Mike Duffy show corn costs backing down to 2008 crop year levels.

Iowa Soybean Prices vs. Costs Soybean costs also fall, but hold above 2008 crop year levels.

Supplemental Revenue Assistance Payments Program (SURE) Part of the 2008 Farm Bill Permanent disaster assistance Provides payments to producers in disaster counties for crop losses Run by the Farm Service Agency, USDA Covers the 2008-2011 crops

2008 SURE Map

2009 SURE Map

Average Crop Revenue Election (ACRE) ACRE is a revenue-based counter-cyclical payment program Based on state and farm-level yields per planted acre and national prices Producers choose between the current price-based counter-cyclical payment (CCP) program and ACRE Program has state and farm trigger levels, both must be met before payments are made

ACRE Set-up for 2009 Iowa Corn Year Yield per Planted Acre (bu./acre) 2004 181.0 2005 173.0 2006 166.0 2007 171.0 2008 169.0 Olympic Average Year Season-average Price ($/bu.) 2007 4.20 2008 4.06 Average 4.13 So the expected state yield would be 171.0 bushels per acre and the ACRE price guarantee would be $4.13 per bushel.

ACRE vs. CCP CCP pays No CCP payments No ACRE payments ACRE pays out

Quick Comparison (Your results may vary) Source: William Edwards, ISU Extension

Fear, Greed, and Ego Fear of making a bad decision -- Watching prices slip away as you wait Greed of expecting even higher prices -- Not taking advantage of good price opportunities Ego of wanting to claim you caught the market high -- “Lake Wobegon” marketing

Ego Greed Fear Agriculture’s link to the energy markets has been a strong one. Corn and soybean prices have tracked with oil prices since late in 2006.

Marketing Plan To avoid fear, greed, and ego dominating your marketing, have a plan and stick to it. A marketing plan outlines your market strategy and your marketing objectives. It should examine marketing opportunities before and after harvest.

Marketing Objectives Get the highest selling price Reduce price risk Pretty tough to do More realistic objective: Obtain better than average prices Reduce price risk Cover cash flow needs Minimize tax liability Look at short and long-term goals for your business

Knowing Your Farm Financials …Provides you several targets for your marketings Do prices cover your cash expenses, meeting your cash flow needs? Do prices cover your total expenses, providing profit and adding to your net worth? On the production side, we often compare yields to trend; on the marketing side, we need to compare prices to per-unit costs.

Building a Marketing Plan 5 basic steps: Estimate number of bushels to sell Calculate breakeven price Project price and yield scenarios Compare pricing tools and analyze market opportunities Develop a pricing plan

Bushels to Sell Breakeven Costs What’s your expected production? What do you have in storage? What about on-farm use? Breakeven Costs What are your production costs? What are your storage costs? On-farm vs. off-farm? What are your cash flow needs?

Tools and Opportunities Scenarios Seasonal price trends Weather outlook Export picture Livestock outlook Tools and Opportunities Market tools: Futures, options, forward contracts Government tools: Crop insurance, marketing loans, CCP/ACRE

Tentative Pricing Plan Outline realistic pricing targets Have periodic price targets and quantities to sell Have patience and be willing to reevaluate price goals Remember it’s hard to lose money when making a profit

Thank you for your time. Any questions. My web site: http://www. econ Thank you for your time! Any questions? My web site: http://www.econ.iastate.edu/faculty/hart/ Iowa Farm Outlook: http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/ Ag Decision Maker: http://www.extension.iastate.edu/agdm/