1. Assistant Professor/Grain Markets Specialist
Risk and Reward 2010
Manchester, Iowa
Feb. 24, 2010
Chad Hart
Assistant Professor/Grain Markets Specialist 1

2. U.S. Corn Supply and Use 2007 2008 2009 2010 Area Planted (mil. acres)
93.5
86.0
86.5
89.0
Yield
(bu./acre)
150.7
153.9
165.2
160.9
Production
(mil. bu.)
13,038
12,092
13,151
13,160
Beg. Stocks
1,304
1,624
1,673
1,719
Imports 20 14 10 15
Total Supply
14,362
13,729
14,834
14,894
Feed & Residual
5,913
5,246
5,550
5,350
Ethanol
3,049
3,677
4,300
4,500
Food, Seed, & Other
1,338
1,276
1,265
1,290
Exports
2,437
1,858
2,000
2,100
Total Use
12,737
12,056
13,115
13,240
Ending Stocks
1,654
Season-Average Price
($/bu.)
4.20
4.06
3.70
3.60
USDA’s 2009 projections based on conditions around Feb. 1 and USDA’s 2010 projections from Ag Outlook conference. Crop year 2009 is the largest corn crop, but the early outlook for 2010 is a record setter. Demand is projected to recover across the board (higher feed, ethanol, and export demand) for 2009/10, 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 are up with the record crop, but could decline with additional harvest losses. Current price estimate of $3.70/bushel for 2009/10. The early 2010 outlook calls for area moving back to corn. Feed demand is expected to slip, but this is offset by more feed usage of distillers grains. Ethanol demand is projected to remain above mandate levels and exports slowly climb. Despite the relative increase in demand, USDA has corn prices moving down to $3.60.
Source: USDA 2 2

3. U.S. Soybean Supply and Use
2007
2008
2009
2010
Area Planted
(mil. acres)
64.7
75.7
77.5
77.0
Yield
(bu./acre)
41.7
39.7
44.0
42.9
Production
(mil. bu.)
2,677
2,967
3,361
3,260
Beg. Stocks
574
205
138
210
Imports 10 13 8
Total Supply
3,261
3,185
3,507
3,478
Crush
1,803
1,662
1,720
1,655
Seed & Residual 93
101
177
168
Exports
1,159
1,283
1,400
1,325
Total Use
3,056
3,047
3,297
3,147
Ending Stocks
330
Season-Average Price
($/bu.)
10.10
9.97
9.45
8.80
USDA’s 2009 projections based on conditions around Feb. 1 and USDA’s 2010 projections are from the Ag Outlook conference. The 2009/10 crop is 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 $9.45/bushel for 2009/10. For 2010/11, USDA has acreage falling slightly, but we’re still looking at another large soybean crop. Crush demand is expected to back off as export demand for soybean meal shifts to South America. Export demand falls for the same reason. Given the relative supply/demand shifts, USDA has soybean prices falling back to $8.80 for 2010/11.
Source: USDA 3 3

4. 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. Markets are concerned about the quality of grain in on-farm storage. As the temperature heads up, conditions could deteriorate quickly. The three most important numbers a farmer needs to know right now are the temperature, moisture, and test-weight of their crop in the bin.
Source: Hurburgh and Elmore,
ICM News, 10/15/09 4 4

5. World Corn Production Source: USDA
World corn production has projected to be up slightly, with the U.S. increase offsetting a drop in the rest of the world. Half of the drop in the rest of the world is in China (drought). Argentina’s crop is rebounding from last year’s drought.
Source: USDA 5 5

6. Corn – Argentina & Brazil
South American corn area is down over the past two years. Last year’s drought pulled production down as well. Production estimates have been raised over the past couple of months.
Source: USDA 6 6

7. World Soybean Production
World soybean production is projected to be up, with increases in the U.S., Brazil, and Argentina. We are looking at record production out of South America.
Source: USDA 7 7

8. 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 as their harvest kicks in.
Source: USDA 8 8

9. Hog Returns vs. Corn Prices
Margins have been improving recently, even with higher crop prices. Looking for demand strength both here and abroad.
Sources: ISU Extension, Farrow-to-Finish;
USDA-NASS

10. Hog Crush Margin
The Crush Margin is the return after the pig, corn and soybean meal costs.
Carcass weight: 200 pounds Pig price: 50%of 5 mth out lean hog futures
Corn: 10 bushels per pig Soybean meal: 150 pounds per pig
Based on current futures, adjusted for average Iowa basis. Breakeven around $40/head. Margins look decent for hogs placed now through May, but head south as we go into summer. There is some recovery in margins next fall.
Source: Dr. John Lawrence, ISU Extension

11. Exchange Rates (Jan. 2003 = 1) Source: USDA, ERS
The dollar had been on a long-run slide, but turned around quickly last fall. The slide resumed in As the dollar falls, our agricultural exports look less expensive to the rest of the world and exports tend to increase. USDA export projections are up with the fall of the dollar. But the dollar may fight back in 2010, especially if interest rates increase. The early call for 2010 shows a relative flat dollar (up against the Euro and Brazilian Real, down against the Yen and the South Korean Won).
Source: USDA, ERS

12. Corn Export Sales Source: USDA, FAS
Corn sales are roughly in line with last year, but a recent upkick has put us above last year’s pace. Hopeful signs include early purchases by some non-traditional markets.
Source: USDA, FAS

13. 2009 U.S. Corn Exports Source: USDA, FAS
Africa and South Asia have been early buyers. Japan is a little behind last year’s pace, but is expected to continue as our largest export market. A recent trade of some concern, Japan switched a corn purchase over to Argentina.
Source: USDA, FAS

14. Soybean Export Sales Source: USDA, FAS
Early soybean sales to China are double last year’s pace. China, thus far, has purchased more than the equivalent of Iowa’s soybean production. So export strength continues in that market. But as we look later in the year, competition will build from South America. Sales have begun to slow down.
Source: USDA, FAS

15. 2009 U.S. Soybean Exports Source: USDA, FAS
It’s China, but we are now seeing growth in other markets (such as Mexico).
Source: USDA, FAS

16. Renewable Fuels Standard (RFS)
Crop
Year
Billion Bushels
2008
3.57
2009
4.11
2010
4.43
2011
4.64
Over the near term, corn-grain ethanol is the big biofuel. The table shows the corn needed to create enough ethanol to meet the conventional biofuel targets. For the 2008 crop year, the mandate called for 3.57 billion bushels of corn for ethanol. We used 3.7 billion bushels. For the 2009 crop year, the mandate points to 4.11 billion bushels and projected usage is at 4.2 billion bushels. By 2015, we are looking at roughly 5 billion bushels worth of demand. 16 16

17. Ethanol Margins Source: ISU, CARD
The graph breaks ethanol prices into costs and returns on a per gallon basis. Yellow is energy costs to create a gallon of ethanol. Maroon is corn costs (less distillers grains value) to create a gallon of ethanol. Blue is all other costs and returns. The black line is a rough measure of breakeven for the industry. The high returns in 2005 and 2006 spurred on ethanol development. The breakeven returns of the last year have halted that construction. But margins have improved in the last few months.
Source: ISU, CARD

18. 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

19. Outside Influences (Jan. 2007 = 1)
Biofuels have linked the energy and agricultural markets. We followed oil high to its record highs and followed it most of the way down. Ethanol policy helped put the brakes on ethanol’s price fall (in comparison to oil) and provided somewhat of a floor for crop prices. But with oil heading upward again, crop prices will follow.

20. Corn
The relationship between corn prices and ending stocks used to be fairly stable, but…

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

22. Corn Futures Trade Source: CFTC
Another factor is a return of the funds in the market and their subsequent retreat. When will they make their next run?
Source: CFTC 22 22

23. 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). The wild card here is crop condition in the bin. If the crop begins to deteriorate quickly, that will force supplies to move quickly into the market and drive basis levels lower.

24. 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 had consistently pointed to a 2009/10 season-average price of $3.70 to 3.80 before the Jan. USDA report, but fell to around $3.50 right after the report.

25. Projected 2009 Season-Average Soy Price
As with corn, the futures market had flipped to the bullish side since October. The futures market has consistently pointed to a 2009/10 season-average price of $9.50 to prior to the Jan. USDA report. But the market backed down to the $9.25 – 9.35 range afterward.

26. Corn Futures Source: CBOT, 2/19/10
Fairly good carry in the corn market through July. Dec futures point to higher prices for the 2010 crop and insurance prices around last year’s level.
Source: CBOT, 2/19/10

27. Soybean Futures Source: CBOT, 2/19/10
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 had been hanging in the $9.20 range. Soybean crop insurance prices should be higher for 2010.
Source: CBOT, 2/19/10

28. Ratio: Nov. 2010 Soy/Dec. 2010 Corn
Futures prices for the 2010 crop have been favoring corn recently. Average around 2.5, above 2.5 favor soybeans.
Source: CBOT

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

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

31. Thoughts for 2009/10 and Beyond
General economic conditions
Projected economic recovery is a major key for crop prices
Weakness in the dollar helps exports, but dollar may fight back
Nearby crude oil prices floating in mid to upper $70’s
Supply/demand concerns
Livestock numbers continue to decline
South America: Record soybean crop and large corn crop
2009/10: USDA: Corn $3.70, Soy $ Futures: Corn $3.49, Soy $9.30
2010/11: USDA: Corn $3.60, Soy $ Futures: Corn $3.82, Soy $8.93

32. Acres Insured in 2008 Corn and Soybeans--Iowa
Source: Dr. William Edwards, ISU Extension

33. Acres Insured in 2009 Corn and Soybeans--Iowa
Source: Dr. William Edwards, ISU Extension

34. Premium Subsidy Rates 60% 64% 80% 65% 59% 70% 75% 55% 77% 48% 68% 71%
Coverage level
Basic Unit subsidy rate
New rate for Enterprise Units
New rate for Whole Farm Units
60%
64%
80%
not avail.
65%
59%
70%
75%
55%
77%
48%
68%
71%
85%
38%
53%
56%
Source: Dr. William Edwards, ISU Extension

35. Source: Dr. William Edwards, ISU Extension

36. Biotech Endorsement (BE)
Available in the entire Corn Belt.
Must be at least 75% of the acres in the insurance unit.
Still need 20% as refuge acres (EPA).
Less documentation this year.
Lack of compliance penalty is loss of premium discount only.
Discount available on yield (APH) or revenue (RA, CRC) but not on group policies
Estimated at 10-15% discount, overall.
Source: Dr. William Edwards, ISU Extension

37. Specialty Soybean Crops
Can now be insured separately.
Low yields will not drag down the APH yield for conventional beans.
Must be covered with an APH (yield) policy, not a revenue policy.
Can use past records to create an APH yield for each type of soybeans.
Indemnity price is higher of contract price or conventional APH soybean indemnity.
Source: Dr. William Edwards, ISU Extension

38. Specialty Soybean Crops
Large seeded food grade – Soybeans commonly used for tofu, soymilk,and miso
Small seeded food grade – Soybeans commonly used for sprouts, or for natto soybeans
Low linolenic acid – Soybeans used to produce soybean oil with a linolenic acid level of 3% or less
Low saturated fat – Soybeans containing 50% less saturated fat than conventional soybeans
High protein – Soybeans containing protein levels of 43% or greater
Source: Dr. William Edwards, ISU Extension

39. Key Points for 2010
SURE and ACRE do not reduce the need for crop insurance.
Indemnity prices will be a little lower.
Compare RA and CRC premiums.
Higher enterprise unit subsidy allows higher coverage levels.
Biotech endorsement expanded.
Specialty soybeans can be insured separately.
Source: Dr. William Edwards, ISU Extension

40. 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 bushels per acre and the ACRE price guarantee would be $4.13 per bushel.

41. Using Latest USDA Projections
ACRE revenue guarantee = $635.61/acre
90% * $4.13/bu. * bu./acre
Proj. ACRE actual revenue = $673.40/acre
$3.70/bu. * bu./acre
No payments under this scenario
Would need yields to fall to 172 bu/acre or price to fall to $3.49 to trigger payments

42. ACRE Payment Rate Matrix ($/acre)
Price
Yield
$2.90
$3.10
$3.30
$3.50
$3.70
$3.90
$4.10
$4.30
$4.50
174
131.01
96.21
61.41
26.61
0.00
176
125.21
90.01
54.81
19.61
178
119.41
83.81
48.21
12.61
180
113.61
77.61
41.61
5.61
182
107.81
71.41
35.01
184
102.01
65.21
28.41
186
59.01
21.81
188
90.41
52.81
15.21
190
84.61
46.61
8.61
USDA

43. ACRE Set-up for 2010 Iowa Corn
Year
Yield per Planted Acre
(bu./acre)
2005
173.0
2006
166.0
2007
171.0
2008
169.0
2009
182.0
Olympic Average
Year
Season-average Price ($/bu.)
2008
4.06
2009
3.70
Average
3.88
The 2009 yields and prices are USDA’s Jan estimates.
So the expected state yield would be bushels per acre and the ACRE price guarantee would be $3.88 per bushel.

44. 2010 Iowa Corn ACRE Guarantee
By formula, the ACRE revenue guarantee would be $597.13/acre
90% * $3.88/bu. * bu./acre
But the ACRE revenue guarantee can not change by more than 10%
2009 guarantee = $637.15/acre
Allowed range is $ to $699.17
So 2010 proj. guarantee is $597.13/acre

45. ACRE Set-up for 2009 Iowa Soybeans
Year
Yield per Planted Acre
(bu./acre)
2004
49.0
2005
52.0
2006
50.5
2007
2008
46.5
Olympic Average
Year
Season-average Price ($/bu.)
2007
10.10
2008
9.97
Average
10.04
So the expected state yield would be 50.5 bushels per acre and the ACRE price guarantee would be $10.04 per bushel.

46. Using Latest USDA Projections
ACRE revenue guarantee = $456.32/acre
90% * $10.04/bu. * 50.5 bu./acre
Proj. ACRE actual revenue = $481.95/acre
$9.45/bu. * 51 bu./acre
No payments under this scenario
Would need yields to fall to 48 bu/acre or price to fall to $8.94 to trigger payments

47. ACRE Payment Rate Matrix ($/acre)
Price
Yield
$8.65
$8.85
$9.05
$9.25
$9.45
$9.65
$9.85
$10.05
$10.25
49.0
32.47
22.67
12.87
3.07
0.00
49.5
28.14
18.24
8.34
50.0
23.82
13.82
3.82
50.5
19.49
9.39
51.0
15.17
4.97
51.5
10.84
0.54
52.0
6.52
52.5
2.19
53.0
USDA

48. ACRE Set-up for 2010 Iowa Soybeans
Year
Yield per Planted Acre
(bu./acre)
2005
52.0
2006
50.5
2007
2008
46.5
2009
51.0
Olympic Average
51.2
Year
Season-average Price ($/bu.)
2008
9.97
2009
9.45
Average
9.71
The 2009 yields and prices are USDA’s Jan estimates.
So the expected state yield would be 51.2 bushels per acre and the ACRE price guarantee would be $9.71 per bushel.

49. 2010 Iowa Soybean ACRE Guarantee
By formula, the ACRE revenue guarantee would be $447.44/acre
90% * $9.71/bu. * 51.2 bu./acre
But the ACRE revenue guarantee can not change by more than 10%
2009 guarantee = $456.32/acre
Allowed range is $ to $501.95
So 2010 proj. guarantee is $447.44/acre

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

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

52. 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 crops

53. Supplemental Revenue Assistance Payments Program (SURE)
Based on crop insurance program, non-insured crop assistance program, and disaster declarations
Whole-farm revenue protection, not commodity-specific

54. 2008 SURE Map

55. 2009 SURE Map

56. Will I get a SURE payment?
Are you in an eligible county or have a 50% or greater production loss
Do you have a 10% production loss on at least one crop
Price declines matter
Corn $ to $4.06 = 24.8%
Soybeans $13.36 to $9.97 = 25.4%
So, even higher yields, up to 120% of the APH yield, on other crops could still result in a SURE payment.

57. Thank you for your time. Any questions. My web site: http://www. econ
Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: