CORN
Corn basis usually bottoms at harvest, and rallies to a peak around early to mid July. Corn Dec. futures are currently trading around $2.02 while cash bids in ND/northern MN are around $1.60. Basis is about -42c for most of the region (and improves as you move south and east), about a 'normal' to slightly below normal basis for this time of year. This is a very large production year, and in spite of that basis is still only about normal (usually it is weaker than normal on a large production year). Generally basis improves to about -15/-20c by about July for a total expected gain of about 20-25c in basis in the next 8 months or about 3c/bu/month. The cost of corn storage in the elevator (3c/bu/month or more) will equal the benefit of the basis increase so with large positive futures spreads (currently it is 2-3c/bu/month) it will probably pay to store corn in commercial storage for a few months. If you have corn in commercial storage, we'd recommend storing it for a few months with a storage hedge in place to protect the downside of futures markets (which are likely to drop further in the coming month or so).
The return from storage calculation is a no-brainer for on-farm stored corn, as expected basis improvement of 20-25c into July combined with futures spreads suggesting 3c/bu/month return will provide huge profits from storage (on-farm storage will only cost 1c/bu/month). Even with corn storage on the ground outside (where loss can be as high as 1-5%), storage will likely be very profitable). Futures spreads in corn are positive (+11c Dec to March, +8c March to May, +6c May to July) so there is almost a full commercial storage margin in the spreads. That is more than enough to pay the interest cost on corn (1c/bu/month at 10% interest, 0.5c/bu/month at 5% interest). It will be very profitable to put storage hedges in place and store corn on-farm into July as basis improvement of even 20c along with futures spreads of 25c would be 45c return to storage. Interest costs of storage would be about 1c/bu/month, so 7 months would cost 7c/bu for a net return of a huge 38c/bu (45c-7c). This is more profit than most producers get from raising the corn! Even for producers who run out of storage space, storing on the ground will be wildly profitable even if you lose up to 20% of the corn due to rot!!! (Corn is only worth $1.60 in ND so a 20% rot loss would be 32c. The profit is 36c so it would even be profitable then!!!)
The proper way to store corn on the ground outside would be to get a hill with heavy sod on it, mow it as close to the ground as possible, put aeration tubes throughout the potential pile area (a good rule of thumb is twice the bin aeration tubes for the amount of grain, and then fence it off to keep deer out. When moving the grain (usually by March/April) its a good idea to use a bucket to scoop it up off the sod, and a vacuvator to such up any remaining grain. We doubt with this program in the far northern corn belt there would be more than 1% loss from ground storage. With low test weight corn (and heavy discounts for it) in the far northern corn belt, this will be wildly profitable over cash sales as huge discounts. This plan loses its luster as you move south across the corn belt (more winter rains the farther east and south you move). But for northern and central corn belt states in the western part of the US, this is a viable alternative to commercial storage or harvest cash sales.
Make sure you hedge the corn in a storage hedge as the futures are likely to drop over winter, erasing the spreads as each month comes to delivery. We would not be surprised for March to drop to $2, May to drop to $2.05, and July to drop to $2.10 by sometime this late winter/spring. The longer farmers store, the more the futures might sag until we get rid of the large surplus production from 2004. The only thing that could change that in 2004/05 would be commodity inflation and a weaker dollar. Until our election is over, though, we doubt there will be any clear direction there (it could even reverse).
As long as the condition of the corn is maintained into the spring/summer months in on-farm storage facilities, it will pay to further store corn into July but if there is risk of the corn going out of condition, perhaps it would pay to sell in May??? We'll see what the basis is in May - if basis is strong enough in May (the full 15c gain already occurs) it would be more profitable to sell all on-farm stored corn in May. Otherwise, holding to July will be most profitable. Pro Ag currently recommends setting a plan to sell all on-farm stored corn that will hold its condition into July, with a potential gain of 38c return from storage. For commercially stored corn, it probably should all be sold in Feb/March. On the ground stored corn will remain profitable as long as it can stay in condition.
SOYBEANS
Soybean basis levels are currently 30c under Nov futures in much of ND/MN, with basis levels improving as you move south and east. This is an extraordinary strong soybean basis for this time of year. This strongly favors selling all cash soybeans now at harvest, and using your storage room to store corn instead. We strongly recommend selling all cash soybeans now once it is LDP'd (so far we have recommended LDPing 75% of soybeans). We would not re-own soybeans with futures/call options at this time as prices are likely to continue to drop as buyers get the need pipeline of soybeans filled. All cash soybeans should be sold as quickly as possible once the LDP is taken. Pro Ag expects to re-own 100% of 2004 soybeans at some point this year (targeting $4.50 futures or the Jan report day), but now is not the time. We anticipate soybeans trading sideways to lower for another 3-6 months (depending on the SAM crop development). But we need to develop a strong export lineup to get rid of the large US 2004 soybean crop. Current projections of 405 mb carryout suggest prices will stay below loan rate for a very long time (until demand is adequately generated).
Rarely does soybean basis peak in harvest, but in 2004 farmers are very reluctant sellers of soybeans because prices have dropped from $10 just this April to less than $5 today. The 50% drop in prices has left many farmers shell-shocked, and unwilling to accept this huge price drop in such a short period of time. But that will likely only serve to keep prices cheap for a long time (perhaps 6 months to 1.5 years???) as more stocks will be left in farmer hands. Pro Ag would suggest that there is plenty of solid reasons why soybeans have dropped to current price levels (a record 2004 crop, huge world/US carryout projections, lower oilseed loan rates) and these reasons are not likely to go away anytime soon. The only thing that can bail out soybean prices in the next year or two is commodity inflation. If that wanes, soybean prices may not break above the $6.14 futures resistance levels for 3-4 years!!!
WHEAT
Wheat basis levels have improved into fall, and usually peak during the the strong late November period (the seasonal peak in fall/winter basis levels). Right now cash bids in ND/MN elevators are trading $3.40-$3.60, with a basis from -20c to even with futures. Due to the huge press given to the difficult Canadian harvest in 2004, basis levels are exceptionally strong for high quality/protein HRS wheat. This is an excellent time to sell all #1 milling, HRS wheat at 14 and above protein. Large protein premiums and good basis levels can be captured with this sale, effectively cashing in on the perceived quality problems with northern US/Canadian grain. Pro Ag feels the 'poor quality' 2004 crop might be overblown, as Canada harvest accelerated greatly in late Sept./early October (just after the most recent Canadian gov't report). We suspect the crop size may improve in the next report due to the excellent harvest conditions after the last report (will harvest losses be less than the last projection???).
For those with less than normal quality, (low falling numbers and/or sprout damage), it might be best to wait for an "all protein" or "all quality" bid to move remaining 2004 cash wheat (but have it all hedged in futures markets). Right now in northern ND there is an 'all quality' cash bid of $2.80 for damaged HRS wheat. If you have low falling number/sprouted wheat, it would be a good idea to sell on this bid as wheat prices are unlikely to improve much anytime soon. In fact, Pro Ag thinks HRS wheat futures are 30-50c overpriced at this time and likely to drift lower all winter (unless commodity inflation bails us out). Currently wheat export demand is slowing, and with a record or near record large crop in both the US and Canada its likely wheat stocks will be up considerably in 2004/05. Another negative is the addition to the EU of 10 former eastern block countries who will be joining the high subsidy EU. These countries are likely to greatly increase production (prices might double in some of these countries from the EU). Also HRS producers in northern ND/MN are likely to greatly increase HRS wheat acreage next year as HRS wheat yields were record large while corn/soybean crops failed to mature (they were reminded by a cool 2004 that they are wheat country, not the corn belt). Thats why Pro Ag recommended pricing 50% of 2005 HRS wheat (after selling all of 2004 HRS wheat on a good basis/quality discount structure). We also would recommend selective hedgers sell $4 Sept05 Mnpls calls on the remaining 50% with a stop at 2x premium sold. If you aren't sold out of 2004 crop due to poor quality grain/big discounts, make sure you have 100% hedged in March, May, or July futures to protect against future price drops. Its likely HRS wheat futures will lose 30-50c over the winter as we try to build demand in a lackluster market.
If you have any questions about these basis notes and recommendations, please call our office anytime.