Market opinions are a dime a dozen, and sometimes I feel a little out of the loop for not cultivating and selling my own price opinions (and I have opinions, really!). Instead, I tell farmers to quit looking “outward” for marketing advice (What do the pros think I should be doing?) and  look inward to their own operation for marketing actions that make sense for their business. This is the approach I took four weeks ago. Based on my analysis of production costs in 2010 and the opportunity to lock in an impressive margin over one year out, I made 2010 new crop sales of corn at $4.55 Dec’10 , $9.99 Nov’10 and $7.45 Sep’10 spring wheat futures. I had no idea that just four weeks later these prices would be 70 cents lower in corn, and more than $1 lower in soybeans and spring wheat.

And that’s just the 2010 contracts - new crop prices for 2009 are down even more.

Dec’09 corn futures are trading under $3.50 per bushel, lower than early December and back to levels last seen in January of 2007 (life-of-contract lows still seem far away at close to the $3 mark set in September of 2006). Nov’09 soybean futures are having a bad day – down 43 cents as of midday on Tuesday and close to the $9.20 mark. That’s over $1.50 lower than levels seen in the middle of June. Sep’09 spring wheat futures closed at $8 on June 1 and trade today close to $6.13 per bushel. All of these markets are “oversold” and have been for about two weeks.

Look inward. Have a marketing plan based on your business needs and not on the noise around you. Execute the plan with discipline. This is the only approach I know that gives you half a chance of taming the markets and not letting the markets tame you.

I’ve been busy writing and shooting a series of short videos for a special “Back to School” website from Corn & Soybean Digest. The idea is for me to pose questions on grain markets and marketing. My questions will range from a simple testing of your futures and options knowledge, to trivia about grain markets. You can take the quiz and grade yourself on the website. Look for the initial rollout in about two weeks. I will post a link as soon as the site goes “live.”

In the meantime, if you have a question that you think my audience would find interesting, please send it to me at usset001@umn.edu .

The corn market is in “contango,” i.e. showing positive carrying charges, even from old crop Jul’09 futures to new crop Dec’09 contract. This adds a little twist to our analysis of the 11th Commandment in corn; “Thou shall not hold unpriced grain in the bin after July 1.”

In my last post, I focused on the current large inverse in soybean futures; the spot price of soybeans is about 150 cents over the new crop Nov’09 contract. By harvest you can expect a southern Minnesota/northern Iowa soybean basis of 50 cents under the Nov’09 contract. I expect the soybean basis to weaken $2 between now and the third week of September. How’s that for an old crop/new crop transition?

But the corn market is in positive carrying charge mode. The corn basis is many parts of southern Minnesota is currently about 35 cents under the Jul’09 contract. The carrying charge from Jul’09 to Dec’09 is about 20 cents, so the current basis translates to about 55 cents under the Dec’09 contract. What is the bid for new crop delivery of corn? 50-55 cents under the December contract speaks for much of southern Minnesota.

Here’s the lowdown on corn and the 11th Commandment. Unlike soybeans, your basis risk on unpriced corn held in storage is minimal – the spot market for corn and for new crop delivery are both trading at or near 55 cents under. Your risk in old crop unpriced corn is in the futures price. On Friday, the Dec’09 corn contract closed at $4.04 per bushel. Since 1990, the December corn contract has traded lower in 2 of 3 years from the first week of July to the second week of October.

Even with minimal basis risk, I’m paying attention to the 11th Commandment.

As we slide into the final week of June, I think it is a good time to review the 11th Commandment of grain marketing, “Thou shall not hold unpriced corn or soybeans in storage after July 1.” The 11th Commandment also applies to spring wheat, but I would move the date up to June 1.

Two powerful forces come into play in grain markets during the summer months. One force is a strong seasonal tendency for futures prices to trend lower from spring to harvest. The other force is basis, which also generally declines from summer to harvest.

To illustrate the importance of basis in the 11th Commandment, let’s focus our attention on the current situation in soybeans. The stocks situation in soybeans is tight, and the tightness is reflected in an inverted futures market. The old crop Jul’09 contract is trading at a $2 premium to the new crop Nov’09 contract. The nearby soybean basis in Southern Minnesota is about 55 cents under the Jul’09 contract – or $1.50 over the Nov’09 contract. In about 3 months, when soybean harvest is in full swing, the nearby basis will be about 50 cents under the Nov’09 contract.

Do you still have unpriced soybeans in storage? Are you ready for a $2 decline in the November soybean basis over the next 14 weeks?

It is, of course, possible that the nearby basis and futures markets will trend even higher over the next few weeks, only to be followed by an even sharper decline into harvest. But you are dancing very close to the flame with unpriced bushels.

Do you recall what happened in July of 2004? Cash soybean prices declined from over $9 per bushel in the beginning of the month to less than $6 by the end of the month. Do you recall what happened just last year? Soybean prices were over $15 per bushel in the beginning of July and ended the month at about $13 (on its way to $8 at harvest).

I want no sinners in grain marketing this year!

I will be speaking in Halifax, Lewisburg and Mertztown, Pennsyvania on Monday, Tuesday and Wednesday evenings of next week. The topic is “Grain Marketing is Simple” and I am looking forward to the opportunity to speak with growers in the eastern corn belt. Contact me at 651-308-8224 if you want to know more about specific locations and times.

Earlier this week I posted all new pre-harvest marketing plans for 2010 corn and 2010 soybeans. Clearly I’m on a roll, so I would be remiss in excluding my ideas for 2010 pre-harvest marketing of spring wheat.

I am trying to make the argument that my interest in starting the process of marketing my 2010 crop is not driven by price levels. Rather, I see very attractive margins based on current quotes and implied production costs for 2010. As good as those implied margins are in corn and soybeans, they are even better in the world of spring wheat.

FINBIN is a great resource for financial data on actual farms but today I point you to the 2008 North Central & Northwestern Farm Business Management Annual Report. On page 43 I learn that, based on the actual results for 107 farms, the average cost of producing spring wheat on cash rented ground in 2008 was $4.94 per bushel. This figure takes into account direct government payments of $14 per acre and includes a labor and management charge of $23 per acre. Based on lower fertilizer costs, I would make the argument that spring wheat production cost will be no higher in 2010.

So I am reasonably confident of my ability to produce wheat at a cost of about $5 per bushel in 2010. At what price can I sell my 2010 production? The Sep’10 spring wheat contract is currently trading at $7.50 per bushel, or a cash price of $7.10-7.20 per bushel at harvest in 2010. That’s an implied margin of over $2 per bushel! My 2010 marketing plan is published and I’m in.

The 2010 September spring wheat contract began trading about 6 months ago. The Minneapolis Grain Exchange closed its trading pit in mid-December, 2008. Did this contract ever trade in the pit? This is trivia. But it is important to note that, unlike corn and soybeans, there are no quotes for spring wheat futures prices for 2011 or 2012.

On Monday I completed the execution of my 2009 pre-harvest marketing plan for soybeans. The official start of summer is still 11 days ahead of us and I have about 75% of my 2009 soybean crop priced at a weighted average price of $11.18 per bushel, Nov’09 futures. This is a good price, but I hope that prices continue their upward trend – I would rather sell the remaining 25% for $13 rather than $8 per bushel.

2010 is on my radar, and it should be on yours too. Nov’10 soybean futures closed just shy of the $10 mark on June 9. Assuming a basis of 70 cents under at harvest, I can start pricing 2010 soybeans at a cash price of $9.30 per bushel. Earlier this week I worked through a cost of production analysis on FINBIN and estimated my 2010 soybean COP at about $8.35 per bushel (Southern Minnesota figures, assumes an average yield of 50 bu./acre). I went back 10 years with FINBIN COP figures and compared them to early pricing opportunities – the chance to lock-in a margin of nearly $1 per bushel in soybeans is not common. I consider this a great place to start.

Should we look beyond 2010, to 2011 or 2012? (Yes – the Nov’12 contract started trading earlier this week) I am reluctant to price more than two years out. What will be by rotation needs in 2011? What will fertilizer, seed and rent cost in 2012? What changes are ahead for farm programs? Too many questions make me gun shy about getting too aggressive, too early.

The wild prices of a year ago may mess up our thinking for years to come. The margins in grain production a year ago were off the chart. Based on today’s pricing opportunities for 2010 and implied production costs, margins are very good – but not off the chart. I’m not waiting for “off the chart” to take action.

My 2010 pre-harvest marketing plan for soybeans will be posted by the end of the day. My minimum price objective for sales is a cash price of $8.35 per bushel, or $9.05 Nov’10 futures. Even with an early sale premium, prices are high enough to warrant two sales for 2010, or roughly 20% of my expected crop.

What will your plan look like?

Yesterday was a final decision date for my 2009 pre-harvest marketing plan for corn. I made a sale of Dec’09 corn futures at $4.58 per bushel, well above my minimum price objective of $3.95, but not nearly as high as the $6.45 level at which I made my first sales last August. I am now 75% priced on my mythical 2009 corn corn at an average Dec’09 futures price of just over $5.00 per bushel, or a cash price of $4.50-4.60 per bushel at harvest. I think it is time to turn my attention to 2010.

Every producer struggles with the question of when to start pricing a crop. On one extreme is the farmer who says, “You can’t price what you don’t have.” These are producers who start the process at harvest time. At the other extreme are those who note that futures quotes and pricing opportunities are available for 2009, 2010, 2011 and 2012 corn (quotes for 2011 corn started in July of last year and I saw the first quotes for Dec’12 corn futures today). I am not comfortable reaching out more than two crop years. To look out as far as 2011 or 2012 demands a high level of confidence in crop rotations, input costs and government program support.

That said, it is time to look ahead to the 2010 corn crop and pricing opportunities. Fertlizer quotes for fall 2009 application are readily available, and nitrogan and DAP prices are back to levels last seen in 2007. Only potash prices remain stubbornly high. If I have a handle on rent and fertilizer prices, I have a pretty good handle on my 2010 production costs. I used the FINBIN data base (the most important and underutilized tool available to farmers) to estimate production costs for corn in Southern Minnesota. Assuming 4-year average yields of 175 bu./acre, I estimate that I can produce a bushel of corn for $3.60-3.70 per bushel. This figure assumes a direct government payment of about $20 per acre, and includes a labor and management charge of $40 per acre.

Based on the cost of production analysis, I wrote a pre-harvest marketing plan for 2010 corn. I posted the plan earlier today. My minimum price objective for 2010 is a cash corn price of $3.65 per bushel (consistent with COP analysis). Assuming a harvest basis of 40 cents under the Dec’10 contract translates into a futures price minimum of $4.05 per bushel.

With Dec’10 futures currently trading near the $4.55 level, a sale at current 2010 futures prices can lock in a profit level of nearly 50 cents per bushel. Last year aside, the market rarely gives corn farmers an opportunity to lock-in profit levels of more than 25 cents. I took action yesterday to price roughly 20% of the 2010 crop. I suggest that anyone who chooses to price corn for 2010 also lock-in their fertilizer needs at the same time. My interest in 2010 is not driven by price alone, rather the estimated margin over input costs.

Stay tuned. I plan to talk 2010 soybean and spring wheat pre-harvest plans in the days ahead.

Nearby CBOT Corn Futures, Weekly Chart

Today is a special day of sorts. It is the six-month anniverary of a major price bottom in grain markets.

Grain prices reached record levels in 2008. The wheat markets peaked in February, with hard red spring wheat leading the way. The March’08 spring wheat futures contract reached the $25 per bushel mark on Febraury 25, 2008. Corn and soybeans peaked later. July’08 corn futures topped out at $7.62 1/2 on June 27, 2008, and Aug’08 soybeans peaked six days later at $16.52 per bushel.

(Adherents to the 11th Commandment of grain marketing take note. The 11th Commandment says, “Thou shall not hold unpriced cash grain in the bin after July 1.”  That was very good advice in 2008. FYI, my calendar says it is the 5th of June. Do you still have some 2008 old crop in the bin?)

Prices started a long and powerful down trend in early July. Prices bottomed out six months ago today, on December 5, 2008. How low did we go? Look at the nearby contracts on December 5, 2008, and compare them to where we stand today, six months later.

Nearby Minneapolis Spring Wheat Futures, Weekly Chart

Mar’09 corn futures traded at $3.06 1/2  – nearby corn futures lost 60% of its value in just over 5 months. Today the nearby contract trades near $4.45, a 30% retracement of the move from last years high prices to the December 5 low.

Nearby CBOT Soybean Futures, Weekly Chart

Mar’08 soybean futures traded at $7.80 – less than half the value of early July, 2008. Jul’09 futures are near at $12.25 today. The soybean market has enjoyed a 50% retracement from the early December lows. Soybeans sport the healthiest price recovery. That’s what fewer acres, a poor Argentina crop and strong China demand can do for a market.

Minneapolis March’09 spring wheat futures reached a low of $5.50 per bushel on December 5 (Chicago March’09 and Kansas City March’09 wheat markets also bottomed on December 5, at $5.01 and $4.71 per bushel, respectively). I will avoid using percentages when comparing that figure to the $25 nearby high of just 10 months earlier. Nearby spring wheat futures are trading near the $7.50 mark today, 36% higher than the early December lows.

Here’s the $64,000 question: Does the grain price recovery enjoyed since early December (and most of it occuring in the last 12 weeks) represent the start of another sustained bull market, or is it your basic bear market rally? I’ve been wrong before, but count me in the camp of a bear market rally.

Last week as I was hidden away deep in the BWCAW – out of cell phone range – I built up a cache of phone messages. Several people from the University were trying to tell me that Fox News was coming to town early next week. Ruth Ravve, a Fox News reporter, wanted to record an interview with me about the current grain markets.

This particular Fox News group hails from  Chicago and made their way to Minnesota to cover the court proceedings of the Franken/Coleman battle. The interview with me was a secondary purpose. Yesterday morning, a University media relations person contacted me to set an interview time of 10:00 am this morning. Later in the afternoon they called again to cancel the interview. Later still, the Fox News reporter called me directly to reschedule the 10:00 am shoot. I convinced her that we should do it at the now empty floor of the Minneapolis Grain Exchange, just two blocks from where she and her film crew were staying.

Reporters are always looking for the angle that connects with the average viewer. The subject was corn and soybean prices, which have been trending higher for several months now. Was this trend caused by planting delays in the Eastern Corn belt and the Red River Valley of the North? Should consumers be wary of higher food prices in the months ahead?

I doubt if my answers warrant air time. Yes, the Illinois and Indiana corn crops are late getting into the ground. But the latest crop conditions report indicated that farmers in both states got another 20% of their corn planted in the last week of May – both stand at about 80% planted vs. a five year average of 95-98%. Late? Yes. Panic time? Hardly. It is early June and I suspect the next report will have these states nearly caught up.

Higher food prices? Hog prices are in the tank. Last week in Northern Minnesota, I bought four large stuffed pork chops to feed four large hungry men for a total cost of about $6. The dairy industry is reeling. Convenience stores in my area are offering milk at the low price of two gallons for $5. The poultry industry is suffering and retail prices reflect the pain. For the economy in general, long-term inflation concerns are real. But I struggle making the case today.

Percentage changes in S&P 500 Index (red) and corn futures (green), December contracts

Since bottoming in early December, corn and soybean prices are much higher. Soybean prices have reason to trade higher. In the past six months we’ve learned that U.S. acres will be cut, the soybean crop in Argentina is smaller, the dollar remains weak and exports to China are two thumbs-up. Corn prices are also higher, riding the back of an idling (out-of-gas?) ethanol industry and limping livestock and dairy industries. I think the accompanying chart says it all. Right or wrong, corn prices (and commodity prices in general) are tracking with markets thoughts about the economy, as reflected in stock prices.

As we were wrapping-up the shoot, Ruth’s Blackberry rang with an important message from the Fox News center in Chicago. Governor Pawlenty was calling a news conference to discuss his future in politics! Get to the Capitol ASAP to cover the news conference!

I owe the Governor.