NEW PLOT at a NEW LOCATION!!!

It is that time of year when you get to walk the plots and find the best corn hybrids and soybean varieties for your farm. This year the Macon Extension Plot sponsored in conjunction with Main Street Bank and Trust will be at a new location located approximately 4 miles north and one mile east of the Extension Office on the Albert Farm owned by Decatur Memorial Foundation with Chris Schick as the Cooperator. Please come and enjoy the evening.

Program
5:00 p.m. Self directed Plot Tour
6:00 p.m. Dinner
6:30 p.m. Speakers
Chris Schick, Plot Cooperator, "Condition of the Plot"
Dennis Bowman, U of I Crop Specialist, "Conditions in Illinois"
Dr. Darrell Good, University of Illinois Economist, "Market Outlook"
Door Prize Drawing
Location: at the DMH Albert farm miles north of Decatur on Jordan Road

Summary Corn

June 1 stocks of U.S. corn were estimated at 3.534 billion bushels, 828 million less than the inventory of a year earlier, but about 75 million more than expected by the market. The stocks figure implies a slow down in domestic corn feeding during the third quarter of the marketing year, even though livestock numbers remained large. Year ending stocks will not be as tight as projected before the June stocks estimate was released.

The USDA's June Acreage report indicated that U.S. producers planted 92.888 million acres of corn in 2007, 2.434 million more than intentions reported in March and 14.561 million more than planted in 2006. The USDA projects acreage harvested for grain at 85.418 million acres and calculates the trend yield at 150.3 bushels, pointing to a 2007 harvest of 12.838 billion bushels, 2.3 billion larger than the 2006 crop and 1.031 billion larger than the previous record crop of 2004. Our expectation is very near that, at 12.81 billion. A crop at that level would result in some build-up in stocks during the 2007-08 marketing year. However, with the rapid expansion in use of corn for ethanol production, U.S. corn acreage will likely have to increase again in 2008 to maintain supplies at a level to accommodate all users at reasonable prices.

Corn prices, and particularly the new crop basis, will remain weak into harvest if the final two months of the growing season point to an average yield above 150 bushels per acre. Basis and cash prices are expected to rebound after harvest in order to ensure large corn acreage in 2008. Based on conditions in mid-July, a 2007-08 marketing year average farm price of $3.30 is expected. At the close of trade on July 17, the futures market reflected a 2007-08 average farm price near $3.35.

Price Prospects for Corn

Our projections of likely production, consumption, and ending stocks for the 2007-08 marketing year result in a year ending stocks-to-use ratio of 9.9 percent, about equal the 10 percent we expect for the current marketing year. For the current marketing year, the average farm price will be near $3.05 per bushel. That price was significantly influenced by the large level of early sales at what turned out to be low prices. The average farm price received in September 2006 was only $2.20 and the price in October was only $2.54. Easily 40 percent of the 2006 crop was sold in the first four months of the marketing year at an average price of only about $2.70. Most early sales of the 2007 crop have been made at much higher prices than the sales of a year ago. In addition, given that early sales were a "mistake" last year, sales have likely been much smaller so far this year. We anticipate a 2007-08 marketing year average farm price near $3.30. At the close of trade on July 17, the futures market reflected an average farm price of about $3.35 per bushel. On July 12, the USDA forecast the 2007-08 marketing year average price in a range of $2.80 to $3.40.

The price of corn for the 2007-08 marketing year will likely trade in an extremely wide range. For the next few weeks, progress and condition of the crop will be the primary price influencing factors. The USDA will release the first crop production forecast of the season on August 10. That report will set the stage for price movement into harvest. If a large crop is expected, weakness in futures prices and basis levels will likely occur into the harvest period. Many observers expect a shortage of storage capacity to pressure an already weak new crop basis. In general we expect only modestly more shortages of storage than has occurred the last three years, but more severe problems on a regional basis. Substantial new storage capacity has been constructed, but widespread use of temporary facilities will be required again this year.

Even with a large crop, we expect a recovery in basis and cash prices after harvest. Corn prices will have to recover fairly quickly in order to give producers motivation to maintain or increase acreage in 2008. While the substantially higher prices being offered for the 2008 crop will provide part of that motivation, producers will also likely have to be motivated by higher spot cash prices. The level of prices required will depend to a large extent on the price of soybeans. The price of soybeans after harvest will depend on the size of the 2007 U.S. crop and the magnitude of planted acreage in South America. The ratio of November 2007 soybean futures to December 2007 corn futures on July 17 was 2.56 to 1. The ratio for 2008 was 2.3 to 1. Both ratios favor soybean production over corn production. At a minimum, that ratio will have to be reduced in order to encourage corn production in the U.S. in 2008 A combination of lower soybean prices and higher corn prices appears most likely.

Timing of pricing decisions for the 2007 crop will be difficult if prices are as volatile as anticipated. In general, however, prices are expected to remain at high levels resulting in numerous opportunities for profitable sales. For those with on-farm storage, the combination of weak new crop basis and large carry in the futures market suggests that pricing for delivery late in 2007-08 marketing year offers the opportunity for very good storage returns. On July 17 2007, for example, the harvest bid in central Illinois was $.76 under July 2008 futures. If the basis improves to a typical level of $.15 under July by June of 2006, the market is offering a storage return of $.61 per bushel. At 8 percent interest, the cost of holding $3.00 corn for 8 months is only $.16.

Summary Soybeans

U.S. soybean stocks on June 1, 2007 were record large at 1.09 billion bushels, about 100 million more than the inventory of a year earlier. Year ending stocks are expected to total about 600 million bushels, 150 million larger than the inventory on hand at the beginning of the 2006-07 marketing year.

Producers reported planting only 64.1 million acres of soybeans in 2007, 11.4 million less than the record acreage of 2006. The 2007 harvest is now expected to be the second smallest in 8 years, at 2.66 billion bushels. That is nearly 530 million less than the record crop of 2006. Smaller production will result in a significant reduction in year ending stocks by September 1, 2008.

The average farm price of soybeans during the 2006-07 marketing year will likely be near $6.35, the second highest in eight years. Prices moved sharply higher during the year, however, as the market anticipated, and producers confirmed, a large drop in acreage. Prices were also supported by periods of concern about the condition of the 2007 crop, by the need to encourage expanded acreage of soybeans in South America, and by expanding biofuels production in Europe and the U.S. The average price, as well as the seasonal pattern of prices, during the 2007-08 marketing year will be heavily influenced by the magnitude of plantings in South America and the prospective size of the 2008 harvest there. With sharply declining stocks, expect prices to be extremely volatile, with a strengthening of the basis as the year progresses. The early expectation is for a 2007-08 average farm price near $7.50.

Price Prospects for Soybeans

Soybean prices have been on a roller -coaster in recent weeks. Futures traded
limit-up following the June 29 Acreage report, but dropped dramatically with a reversal of weather prospects in mid-July. The average spot cash price of soybeans in central Illinois reached a marketing year high of $8.545 on July 13, but stood at 7.455 on July 23, reflecting a basis of -$0.71 under August futures. The ample supply of old crop soybeans along with the speculative premium in soybean futures combined to yield a near record weak basis. November 2007 soybean futures traded to a contract high of $9.495 on July 13 but settled at $8.41 on July 23. The average cash bid for harvest delivery on July 23 was $7.72, reflecting a near record weak basis of -$0.69.

Soybean prices are expected to remain extremely volatile as the market works through the uncertainties of U.S. crop size, Chinese demand, South American acreage, and the unknown demand for U.S. soybean acreage in 2008. Basis levels, however, should firm significantly as the 2007-08 marketing year progresses due to the tightening of domestic inventories. The current price structure is rewarding storage of the 2007 crop. The stored crop will have to be forward priced, however, to offer a reasonable chance to capture that return to storage. Unless buyers are bidding a strong basis for deferred delivery, the stored crop will have to be hedged in order to capture the potential basis gain.

The projected 2007-08 marketing year ending stocks-to-use ratio of 7.6 percent suggests a 2007-08 average farm price near $7.50. Futures settlement prices on July 23 pointed to an average farm price near $8.40. Prices may have to be higher than projected by the stocks-to-use ratio to encourage more soybean acreage in the U.S. in 2008. At least a period of high prices might be required, depending on the level of corn prices. Even though prices have declined sharply, values are still quite high. A strategy that involves storing as much of the crop as possible is encouraged by the current price structure particularly if on-farm storage is available. Hedging, or using hedged-to-arrive contracts, on a significant portion of that stored crop to capture basis gain appears warranted. Declining crop condition ratings and/or late season weather rallies may offer an opportunity to place the storage hedges prior to harvest. Storing some of the crop unpriced may pay off if the market has to buy more U.S. acres in 2008 or if South American or U.S. crops experience some weather problems.

Issued by Darrel Good
Extension Economist
University of Illinois