Widespread drought conditions continue to reduce the 2012 U.S. corn and soybean yield potential. Yields are now expected to be well below trend value, so that this year’s production will qualify as “short crops,” according to University of Illinois agricultural economist Darrel Good.
“It is widely anticipated that corn and soybean prices will reach a peak early, sometime in a relatively wide window around harvest time, and then decline as the marketing year progresses,” Good said. “The anticipated pattern is generally described by the adage that ‘short crops have long tails.’ At this juncture of the 2012 season, it appears likely that the corn and soybean price pattern will follow a more or less typical short crop price pattern, at least in terms of the timing of the price peak.
“Based on historical patterns, however, the timing of the price peak could range from the current month until after harvest. With an early harvest, a price peak by September seems most likely, assuming that prices go high enough to slow the pace of consumption sufficiently. Prices are probably not yet high enough for either crop to accomplish that objective,” Good said.
According to Good, for both corn and soybeans there is considerable risk that the U.S. average yield will be lower than now anticipated. For soybeans, demand is also very strong due to the shortfall in the 2012 South American crop and ongoing large purchases of U.S. soybeans by China.
Good explained that for producers with substantial quantities of 2012 crop corn and soybeans to sell, the window for the best price opportunities may be open for a while, but it is not possible to predict the timing and magnitude of the price peak. A strategy of spreading sales over the next several weeks may be prudent. For producers with little or no crop to sell, the major focus may be on maximizing crop insurance payments.
For those with insurance products that include a harvest (October) price guarantee, Good said there may be concern that the price peak will come and go before October. “In that case, some are considering hedging the insurance payment on their production shortfall by selling futures contracts at prices higher than expected to exist in October,” he said. “There are obvious risks with that strategy because prices above the selling price would result in margin payments and foregone income. Those who are considering hedging insurance payments may also want to consider an averaging strategy and/or the use of options to manage the risk.”
Good explained more about the logic of this expected price pattern. He said it is based on three tenets. First, prices need to move sharply higher in a relatively short time frame so that consumption becomes unprofitable to some end users and the overall pace of consumption is reduced to be in line with expected supplies. Second, a short crop is expected to be followed by much larger production in the following year as weather conditions return to normal and producers respond to the incentives of high prices. Third, once prices peak and start to move lower, an extended period of declining prices is required to re-build the pace of consumption to the level of subsequent production. The timing and magnitude of the price peak and the speed and magnitude of the subsequent price decline are determined by the magnitude of the production shortfall, the timing of the recognition of the shortfall, the strength of demand for the crops, and the production response (domestic and foreign) in the following year.
“There isn’t a universally accepted definition of a short crop, but it is generally defined in terms of a U.S. average yield that falls below trend value by some threshold double-digit percentage,” Good said.
For corn, there have been 10 other years since 1970 in which the crop could be classified as short. These include 1970, 1974, 1980, 1983, 1988, 1991, 1993, 1995, 2002, and 2011. The price pattern in those years generally followed the expected pattern described earlier but with some exceptions, Good said. In particular, the timing of the price peak varied considerably in those years.