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Market Advisor: How Will the Corn Market Deal With Crop Quality Concerns?

By Frayne Olson, Crops Marketing Economist

NDSU Extension Service

The slow pace of U.S. corn planting, crop development and harvest progress has created varying degrees of uncertainty in the corn market since last April. The relatively cool, wet summer growing conditions limited the amount of stress the crop was exposed to and built expectations for a record national average corn yield and potentially a new record for total corn production. However, will these expectations be met? Both private forecasters and the U.S. Department of Agriculture estimates seem to be changing every day.

Harvest reports from across the U.S. suggest that average corn yields are good to excellent, but that the crop quality is quite variable. The central and western Corn Belt is reporting very good yields and generally good quality, although grain moisture levels are above average. However, the eastern and northern corn growing regions are finding fields with lower than average test weights and a range of disease issues.

Early harvest reports from North Dakota mention high grain moisture, average to below average test weights and some molds being found. Initial tests from the NDSU Plant Diagnostic Laboratory indicate that cladosporium is the predominant mold in North Dakota. This is a black surface mold that is nontoxic to animals and humans unless it is inhaled. A few samples have tested positive for mycotoxins, but so far the levels have been low.

However, there are reports from Indiana, Illinois and the hail-damaged regions of Iowa of low test weights, mold damage within the seed and moderate levels of mycotoxins. Vomitoxin is the most commonly reported mycotoxin.

How will the corn market deal with crop quality concerns? Part of the answer may come from the corn futures market, but the majority of the answer will come from the cash market. The corn futures market is the common reference point for U.S. corn prices. One of the main functions of the futures market is to serve as a price discovery system. Grain futures markets trade standardized contracts for a specific grain (No. 2 yellow corn) delivered to a predetermined location (selected elevators near Chicago) by a specific time (after the 15th day of the trading month). The price per bushel is the only contract term that is negotiated before contracts are exchanged.

As a result, traders primarily are concerned with issues that can impact the overall grain trade, such as national average yields, harvested acreage, amount of grain in storage, current and expected export pace and level of domestic use. Grain quality only becomes an issue when a significant portion of the total crop has been affected. For example, low test weights across a majority of the Corn Belt would reduce average yields, or very high levels of mycotoxins can make some corn unusable as a feed, impracticable for ethanol use and excluded from export markets. Widespread quality concerns have the potential to catch the attention of futures market traders and raise futures prices. It is still unclear whether the corn quality concerns are widespread enough to lift national average prices.

A more likely situation is that the quality concerns are concentrated in specific locations or regions. In this case, it is the cash market that will need to establish price discounts for quality issues and determine the best outlet for using any low-quality grain.

Typical quality discounts are established on the assumption that a small portion of the grain received will be below average. In most cases, higher-quality grain is available to blend with the lower quality or damaged grain to achieve the acceptable industry standard levels. However, if a significant portion of the local or regional production is damaged or of low quality, local blending may not be a viable option. In this case, the grain buyer may need to increase the price discounts to cover the added cost of handling, merchandizing or using low-quality grain.

For example, most buyers apply price discounts for low test-weight corn. These discounts can vary across buyers and often depend upon how the corn will be used. If light test-weight corn is delivered directly to a local feed mill, price discounts normally will cover the difference in feed value and may be relatively small. However, if light test weight corn is being shipped by unit train to an export market, the train may “cube out before it weights out.” This means that the rail cars will be full before they have reached the maximum weight limit. The elevator cannot ship as many bushels of low test-weight corn in the same train load. This increases the cost of transportation. These added costs will increase the test weight discounts applied to corn sellers.

What does this mean for marketing your corn? Watch your local basis levels and discount schedules closely because they likely will change as more information about the quality of the U.S. corn crop becomes available.

Because of the current reports of test weight and disease concerns in the eastern Corn Belt, it is likely that normal corn movement patterns will shift. Higher-quality corn will be pulled into those regions with quality problems to be blended with the lower-quality corn or to replace the lower-quality corn. The basis and quality discounts within these problem areas likely will increase because of the added cost of transportation and blending or the cost of moving the lower-quality corn into alternative markets.

If your area is experiencing significant quality problems, the simplest marketing strategy is to put your corn into storage on the farm. Don’t let the crop quality deteriorate any further, and allow the cash market to adjust to the new conditions. During the peak of harvest, elevators and processors must receive and dry corn as quickly as possible to prevent long lines and harvest delays. As a result, many elevators and processors build in additional margins because of the risks concerning crop quality, inability to ship or use the grain as fast as it is being delivered and the potential for more grain deterioration during commercial storage. These additional margins typically decrease after harvest. A futures fixed contract, also called a hedge-to-arrive contract, is a viable alternative if there is a rally in the futures market that provides a good pricing opportunity but it occurs before the local basis recovers. A futures fixed contract allows the seller to lock in the futures market price without locking in the basis until the grain is delivered.

If your area has good- to excellent-quality corn, the local basis likely will improve quickly after the harvest is completed and will remain strong for the remainder of the marketing year. The final destination and use of the corn may be different from previous years, but the demand for good-quality grain should remain relatively strong. Any price rallies in the futures markets should be reflected in the local cash market.

In summary, crop quality issues are beginning to emerge in some U.S. corn-growing regions. It is still too early to tell if these concerns are widespread enough to impact corn futures markets. However, local cash markets will adjust to quality issues by increasing the price discounts for low-quality corn, and historical basis patters likely will change as corn moves to alternative markets.


NDSU Agriculture Communication

Source:Frayne Olson, (701) 231-7377, frayne.olson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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