US Crop Production, 2003

1. US Crop Production, 2003 Grain Mil. Ac Mil. bu Corn 71.1 10,114 Soybeans 72.3 2,418 Wheat 52.8 2,336 Sorghum 7.8 411 Barley 4.7 276 Oats 2.2 145

5. Grain Marketing Channel • Local elevators • Grading, drying, some storage • First pricing point • Some processing (particularly feed) • Subterminal elevators • Concentrate grain for shipment • Limited storage • Purchase from local elevators

6. Grain Marketing Channel • Terminal Elevators • Processing • Exports • Export terminal elevators • Ocean port or seaway • Limited storage

7. Grain Pricing • Central price discovery point for grain is the commodity futures markets. • Local markets price on a basis to the futures • Basis accounts for • Location: transportation and local supply and demand conditions • Time: storage cost relative to a futures delivery • Form: type of grain, quality and condition

8. Grain Pricing • Global supply and demand factor in through the futures market daily • Local prices based on futures through a basis unique to each market • Basis within a market impacted by local conditions

9. Grain Pricing • Central Iowa corn price and basis the last week of Nov. 1989-98 Price Basis • Average $2.27 -$.42 • Minimum $1.88 -$.32 • Maximum $2.93 -$.53 • Range $1.05 $.21

10. Storage as a strategy • Grain must be dry and stay in condition • On farm or off farm • Add time utility

11. Storage advantages • Avoid harvest time low prices • Avoid lines at elevator • Increases marketing period • Helps management of income for taxes • Same storage cost for longer storage • Allows quality control for livestock feed

12. Storage Disadvantages • Extra handling of grain • Demands extra attention to marketing • Risk of grain going out of condition • Added investment and tax (on farm) • Must finance storage

13. Drying and conditioning grain • Corn harvested at higher moisture than can be safety stored • No. 2 corn is 15% moisture • Store at 13.5% moisture or less • Harvest losses increase as moisture declines

14. Storage and drying costs • Harvest mid-October at 19.5% moisture • Store until mid-May and sell Harvest price (15% moisture) $2.30 Extra dry @ $.015/point x 6pts +0.09 Storage (on-farm) $.01/month +0.07 Interest @ 9.0% x 7/12 x $2.30 +0.12 May price needed to breakeven $2.58

19. Other Cash Grain Tools • Marketing loan • Loan Deficiency Payment (LDP) • Can use one or the other but not both

20. Marketing Loan • USDA program started in 1996 • 16 crops including corn and soybeans • Designed to help farmers market their crop throughout the year without interfering with basic supply and demand forces • Loan rate set by USDA • Grain serves a collateral • Nine month maximum loan

21. Posted County Price (PCP) • Is calculated daily for each county by Farm Service Agency of the USDA • Based the higher of the Kansas City or New Orleans Gulf price • Accounts for transportation back to county

22. Marketing Loan • Repaying the loan • Prices > loan rate + accrued interest • repay loan + interest • sell the grain at the higher price • Price < loan rate + accrued interest • repay loan at the PCP • keep difference (loan rate – PCP) • you still own the grain • Nonrecourse • Deliver the grain and keep the loan payment

23. Loan deficiency payment • Difference between the loan rate and PCP • LDP is not repaid • Must have ownership of grain • Coordinate paperwork with FSA office • Unless grain is sold or priced at the time the LDP is collected the farmer is speculating on the price of the grain • High percent of 1999 corn and beans have taken the LDP

24. Marketing Loan or LDP • ML is a free price floor (put option) • Guaranteed minimum price (loan rate) • Sell at higher price less storage and interest • LDP has price risk • Hope for falling prices to maximize LDP • Then hope for rising prices to sell grain • Problem arise if markets fall after taking LDP