September 25, 2002 | By: Laura Skillman

The uncertain size of the U.S. corn crop, coupled with robust use, has prices at a level not seen since 1996.

There is still potential for prices to further increase if the crop size continues to drop in the monthly crop reports issued by the U.S. Department of Agriculture, said Steve Riggins, University of Kentucky College of Agriculture grain marketing specialist.

Riggins cautions that with prices higher than they’ve been in six years, farmers should not to let this opportunity go by.

The most recent USDA forecast for the average price for the 2002-03 marketing season is a range of $2.35-$2.75 per bushel for corn compared to the 2001-02 marketing season projected average price of $1.97 per bushel.

The actual size of the U.S. corn crop for 2002 is the most important unknown that will affect the season’s average corn price and seasonal price pattern, Riggins said. Other important considerations are what China does in the corn export market and what the European Union does in the wheat export market.

“The much smaller projected carryover stocks of corn should cause enough concern about sufficient corn supply for this year and concern about sufficient corn acres for next year to provide a driving force for the market,” he said.

The main reason for the smaller U.S. crop is due to sharply reduced yields because of poor growing conditions. The uncertain size of the crop leaves the market in a very precarious condition, Riggins said.

“If the crop is smaller than predicted by the USDA in September, it seems probable that the market still has room to trade significantly higher,” he said.

Conversely, if the monthly projections were to drop only slightly or even increase, the market is subject to a setback.

The key price factor for soybeans is also the size of this fall’s U.S. crop, Riggins said. Of nearly equal importance is the expectation that South America will produce another record large crop in seven to eight months. Another factor is the robust early exports sales and shipments of U.S. produced soybeans.

“If it were not for the expectation of the record supplies from Brazil and Argentina, prices would currently be much stronger,” he said. “Therefore, the final U.S. soybean production is still center stage.”

Riggins said giving grain marketing advice can be a challenge because each farmer’s circumstances are different. But, he does offer some thoughts for growers to consider.

Currently, the market is not paying any spread so this argues not to carry corn in the bin without some marketing options in hand. Even is future prices continue to rally, cash prices may not track very well, and if the market weakens some pricing action will have to be taken quickly to stop the erosion of the value of the grain in bins.

Most farmers are eligible for farm loans from the government which will provide an effective minimum price, but that level is so far below current prices it seems useless to take such a gamble, Riggins said. The current pricing situation also argues against traditional storage hedges.

There are at least three strategies farmers can use for corn. The first, and probably the easiest, is to buy put options that are at- to slightly out-of-the money. This will put a floor under high prices. If the market continues to rally the puts are rolled up to higher strike prices for only modest additional costs.

A second strategy would be to sell the futures market, probably the March or May contract, and buy a call option. This also provides a minimum price but not a maximum.

The third strategy is that grain is sold fairly soon after prices experience a setback. Call options are then bought as a replacement for the grain when the market appears to have leveled off. This also puts a minimum price in place but not a maximum. If prices never recover the farmer will net the cash price minus the call premium. If prices rally sufficiently the farmer can add to the cash price.

All these options require farmers to have targets in mind at which they would price grain on the way up, and at least one price at which they would price grain on the way down.


Steve Riggins, (859) 257-7256