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Resolving the inverse: Drought and normal crop scenarios

Ag News Wire
By Ed Usset, University of Minnesota Extension

ST. PAUL, Minn. (4/1/2013) --The drought of 2012 was an extraordinary event, and extraordinary events create extraordinary circumstances. With planting just weeks away, corn and soybean prices are displaying extraordinary inverses ($2 per bushel and more) from today's price to the price quoted for new crop delivery next fall. In the next five months, these inverses will be resolved. This means that nearby (old crop) and new crop prices will morph together into one price.

There are two ways to resolve this inverse. One way is for new crop prices to rise and meet the higher nearby prices. This is how the inverse was resolved last year, as drought blanketed the Corn Belt. This scenario would be good news for Minnesota farmers. Minnesota, in general, fared better than most Corn Belt states in last year's drought, and a number of Minnesota producers still hold last year's crop in storage.

The other way to resolve the inverse is for old crop prices to collapse toward lower new crop values. History and the productive capacity of the Corn Belt suggest this is the more likely course of resolving the inverse in prices from old to new crop values. There is a double risk in the "normal crop" scenario. Not only could old crop prices collapse, new crop prices could sink even further. This does not bode well for the value of grain in storage, nor does it bode well for producers who have not started to price 2013 corn and soybeans.

Minnesota producers concerned about drought in 2013 seem to have that base covered. Crop insurance is in place, old crop grain is still in storage, and little action has been taken on pricing 2013 corn and soybeans. It may be time to consider the normal crop scenario. Today, new crop pricing opportunities remain at or above production costs. There is no guarantee that this will be true next fall. New crop sales are needed to balance the risk of a "non-drought" scenario.


Any use of this article must include the byline or following credit line: Ed Usset is an economist with University of Minnesota Extension.

Media Contact: Catherine Dehdashti, U of M Extension, (612) 625-0237, ced@umn.edu

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