The Enid News and Eagle, Enid, OK

September 15, 2012

Drought has been factored into grain prices

By Rodney Jones, Extended Forecast

— So far, relief for the drought conditions plaguing northwest Oklahoma has been disappointing at best.

Hopefully, by the time you read this we will have received some beneficial rain. From a grain marketing perspective, the impact of the widespread drought of 2012 already has been factored into prices, so markets are waiting for new information before reacting strongly in either direction.

On the margin, markets will continue to react to chatter regarding final corn yields and harvested acres. So far, yields are extremely variable as expected; however, there have not been widespread overall production surprises, so big changes to current projections are not expected. Similarly, ongoing revisions to soybean production estimates will continue to influence grain markets, and prospects for the South American crop are beginning to factor into the market.

Market chatter continues regarding how much wheat is available for export from Russia and Ukraine as a result of disappointing crops, and the market continues to wait for solid information regarding the Australian crop. There is some talk about some rationing of the demand for grains at current high prices, but it is too early to predict the extent of that.

Bottom line, the big “market changing” news of 2012 appears to already be accounted for, so grain markets are likely stalled in the trading range of the last month or so until significant fresh news comes along. Though analysts are starting to talk about dry planting conditions in the U.S. wheat producing region, it is too early for any production concerns regarding the 2013 wheat crop to be much of a market factor.

Broader global economic news may have as much to do with grain market direction over the next several weeks as grain fundamentals. Prices are high, and profits can be made by producers at current market levels. On the other hand, prices could break out the top of the recent trading range and go even higher. Factor your cash flow needs and your risk tolerance into grain marketing decisions, and have a marketing plan in place and the discipline to follow it if you are sitting on unsold grain.

The crop insurance revenue guarantees for fall seeded crops (wheat and canola) are quite high again this year. Given the current difficult environmental conditions, it is comforting to know there are revenue protection alternatives available in case weather conditions do not improve. Consider any changes that might need to be made to your wheat policy (coverage level, unit structure, etc.) before the end of September.

Finally, you may have heard that the criteria for triggering an ACRE payment for wheat for the 2011 production year has been met at the state level (i.e. the state ACRE revenue guarantee is greater than the calculated per acre actual state revenue). Remember, for an individual farm enrolled in the ACRE program to get a payment, both the state and farm triggers must be met. Therefore, the farm ACRE guarantee also must be greater than the actual calculated farm revenue.

The guarantee is based on the farm benchmark yield multiplied by the ACRE guarantee price of $5.29 (then adjusted for any crop insurance premium paid). The actual farm revenue is based on the actual 2011 yield multiplied by the national average marketing year price of $7.24.

Therefore, even though the state trigger has been met, in order for an individual 2011 wheat farm to trigger a payment the actual 2011 yield must have been significantly less than the historical benchmark yield for that farm. Based on the numbers I have seen so far, some area farms will trigger a payment, but many will not.

While not finalized yet, it appears that other 2011 crops (milo, soybeans, etc.) are likely to trigger ACRE payments both at the state level and at the farm level because yields were so low for most area producers in 2011.

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Jones is Oklahoma Cooperative Extension Service area agricultural economics specialist.