Downside Price Risk for 2013-Crop Grain Is Huge

Downside Price Risk for 2013-Crop Grain Is Huge

Corn and soybean yields anywhere near trend in 2013 point to sharply lower prices. That makes weather the huge crop market price driver.

Weather remains the huge unknown in 2013 crop prospects. But expected plantings of corn and soybeans remain large. Even modest yield shortfalls could let 2013-14 prices drift well below 2012-13 averages.

A year ago, analysts warned that corn prices could slump toward $4 with trend yields. Some farmers forward priced a fair amount of expected 2012 production at prices that eventually ended up well below the short-crop induced rally.

With large 2013 corn and soybean plantings, Pete Riley, economic and policy economist with USDA's Farm Service Agency is again cautioning farmers that anywhere near normal weather could result in corn prices drifting toward $4.

Corn and soybean yields anywhere near trend in 2013 point to sharply lower prices. That makes weather the huge crop market price driver.

After 2012's severe drought and persistent soil moisture deficits, mustering the courage to forward price 2013 crops is a challenge. However, it might be the correct move to make.

Using tools that protect against lower prices, yet keep the upside open could be an appropriate strategy. Agreed, premium costs to use options are pricy. So be sure to understand risk-reward implications before using them—or passing up using them.

Testing weather sensitivity

In his model, Riley examined production and price outcomes with trend yields for corn and soybeans. He also examined prospects with plus and minus one standard deviation for rainfall and temperature in the most critical growing period for both crops. His analysis suggests U.S. corn crop would need a significant yield reduction in order to prevent a sharp corn price slump

USDA's first acreage projection pegs 2013 corn plantings at 96.5 million acres. Down from 97.2 million last year. But still well above 2011's 91.9 million.

Based on normal weather, a 163.6-bushel trend yield projects to a 14.53 billion-bushel crop. That would be 3.75 billion bushels or 34.7% larger than last year's crop. The market-year average price could drift to $4.80.

With rain one standard deviation below normal and temperature one standard deviation above normal during corn's critical pollination period, Riley projects the national average yield would drop to 154 bushels. That yield reduction could hold the market-year average price a dollar higher at $5.80.

The favorable weather, high-yield 170-bushel scenario projects to a market year average price of $4.20.

All three scenarios point to prices well below the expected 2012-13 average of $7.20 and below 2011's $6.22 average.

Drought-induced sharply higher prices for 2012 production encourage other world producers to up production. Pricy grains also encourage users to trim consumption. The U.S. livestock sector is trying to get the most meat, milk and eggs out of every kernel of corn possible.

Downside Price Risk for 2013-Crop Grain Is Huge

Riley ran a similar analysis for soybeans. It pegs the:

* Trend yield 2013-14 market year average price at $10.50.

* Reduced yield market year average price at $11.60.

* High yield market year average price at $9.75.

Those prices are all well below the expected 2012-13 market year average price of $14.30.

Downside Price Risk for 2013-Crop Grain Is Huge

TAGS: USDA Soybean
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