Qasmi, Bashir A.

Shane, Richard

English

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South Dakota State UniversityOpen PRAIRIE: Open Public Research Access InstitutionalRepository and Information ExchangeEconomics Commentator Department of Economics9-24-1993Seasonality In Corn and Soybean Prices ReceivedBy South Dakota Farmers; Grain: Sell or StoreBashir A. QasmiSouth Dakota State University, Bashir.qasmi@sdstate.eduRichard ShaneSouth Dakota State University, richard.shane@sdstate.eduFollow this and additional works at: http://openprairie.sdstate.edu/econ_commPart of the Agricultural and Resource Economics Commons, and the Regional EconomicsCommonsThis Newsletter is brought to you for free and open access by the Department of Economics at Open PRAIRIE: Open Public Research AccessInstitutional Repository and Information Exchange. It has been accepted for inclusion in Economics Commentator by an authorized administrator ofOpen PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. For more information, please contactmichael.biondo@sdstate.edu.Recommended CitationQasmi, Bashir A. and Shane, Richard, "Seasonality In Corn and Soybean Prices Received By South Dakota Farmers; Grain: Sell orStore" (1993). Economics Commentator. Paper 296.http://openprairie.sdstate.edu/econ_comm/296ECONOMICSCOMMENTATORSEASONALITY IN CORN AND SOYBEANPRICES RECEIVED BYSOUTH DAKOTA FARMERSbyBashir A. QasmiAgricultural EconomistGrain markets are characterized byseasonal production and year—around utilization. When a region is self-sufficient,demand year round for a grain can be met bystoring the grain in the region. If theregion has excess demand, the off seasondemand can be met by importing grain fromother regions. If the region has excesssupply, the grain can be exported to otherregions.Seasonal grain price patterns dependon storage costs, distances from otherregions with seasonal excesses of demandand supply, and transportation costs toand from these regions. Seasonal pricepatterns also can change in response tochanges in the relative strengths ofseasonal supply and demand.This article's main objectives are:a) to investigate seasonal patterns in cashprices received by South Dakota farmers(S.D. Prices) for corn and soybeans and b)to make monthly projections for S.D. cornand soybeans prices for the marketing yearSeptember 1993 through August 1994, hereafter abbreviated as simply "1993" or "93".Seasonalitv in Commoditv PricesSeasonality in commodity prices iscommonly studied by computing monthlyseasonal indices. Under this approach, theaverage price for each year is assigned anindex of 100. The prices for differentmonths in a year are then converted intoappropriate indices. If, for example, theaverage October price in a year is 5.2%lower than the average price for the year,the index for October will be 94.8. If theaverage price for May is 12.2% higher thanthe average price for the year, the indexfor May will be 112.2.(Continued on page 2)SOtrra DAKOTA STATE UNIVERSITYNo./3^7 September 24, 1993GRAIN: SELL OR STOREbyRichard ShaneExtension EconomistGrain MarketingGrain storage cost changes as pricechanges because a major cost of storage isinterest. Compared to one year ago whenstorage decisions were made, prices forwheat are lower, feed grains similar toslightly higher and oilseeds higher. So,with slightly lower to constant interestrates, wheat storage cost will be lower,feed grain storage cost the same toslightly higher, and oilseed storage costhigher than last year.When considering storage, producerswill want to compare on farm storage andcommercial storage. With commercialstorage three costs are of concern -- (1)the rate charged by the storage facility,(2) interest on the sales value of thestored grain, and (3) costs associated withwaiting in long lines at harvest time.With on farm storage, costs are broken downas fixed and variable. The fixed costs arenormally not a part of the annual storagedecision because these costs must be paidwhether you store or not. These costsinclude depreciation, interest, andinsurance on the farm storage facility.Variable costs include bin preparation-cleaning, insect control and repair; in andout costs; utilities; and labor. Transportation is not included when comparingselling and storage because the grain mustbe hauled to market some time.Shrink can also be a consideration whenstoring grain on the farm. With commercialstorage your warehouse receipt insures aconstant amount of grain to sell at a laterdate. But loss of moisture, handling loss,insect or rodent damage, and qualitydeterioration all result in fewer bushelsto sell after farm storage. These costsvary widely with storage facility, climate,and farmer. Stored grain must be monitoredregularly for heating or insect infestation(Continued on page 5)PagQ 2(Seasonality ... Continued from p.l)Given monthly data for a number ofyears, average indices for different monthscan be computed which depict an averageseasonal pattern during the sample period.In addition, standard deviations and yearlytrends in the indices also can be computed.Standard deviations for monthly indicesindicate the magnitude of variability inrelevant monthly indices. The yearly trendin a monthly index indicates that the indexfor that month is changing over time.These trends are helpful in forecastingmonthly indices beyond the sample period.Seasonal Patterns in Corn PricesIn a recently completed study at SDSUthe seasonal price patterns for corn, wheatand oats were analyzed for the period fromSeptember 1949 through August 1991.Seasonal indices based on historical datafor 6 years, 11 years, 16 years, 21 years,26 years, and 31 years were computed, andthe price forecasts up to 12 months beyondthe sample period based on these indiceswere evaluated. This research report canbe obtained by writing to the author c/oEconomics Department.A brief summary of major findings ofthis study relating to corn priceseasonality follows.1) Seasonal corn price forecasts improvedwith an increase in the sample size up to21 years. However, increasing the samplesize beyond 21 years resulted in increasederrors in S.D. price forecast and a negligible decrease in U.S. price forecasterrors.2) Both S.D. and U.S. corn prices show adecline following harvest to a seasonal lowin October and reach a seasonal high inJune. Between October and June, onaverage, S.D. corn prices increased 15%whereas U.S. corn prices increased 8%. Inother words, S.D. corn prices exhibitrelatively more pronounced seasonality thanU.S. corn prices. This implies that monthlyS.D. corn price forecasts based on S.D.seasonal patterns will be superior.However, a number of tests also showed thatdifferences in S.D. and U.S. corn priceseasonality are becoming less significantover time.3) For both S.D. and the U.S., variancefor monthly seasonal indices was higherduring August, September, and October; andwas lower during December, January,February, and March. Compared to the U.S.,monthly S.D. seasonal indices showed lessvariance.Monthly Price Forecasts for CornFor this article, the analysis wasupdated using the S.D. corn price data fromSeptember 1972 to August 1993 (the mostrecent 21 years of data). Monthly seasonalindices, standard deviations, yearlytrends, and average projected seasonalindices for crop year 1993 (September 1993to August 1994) were computed. Theseaverage projected seasonal index values areshown in Fig 1 as APSI(93). The computation of APSI(93) is based exclusively on 21years of prior price data, i.e., it doesnot take into account new information about1993 supply conditions. Later, in thisarticle, 1993 corn supply information willbe incorporated in the analysis.Seasonal price patterns are influencedby supply (Beginning stocks + Production +Imports) and use (domestic use + exports).Since data on grain use are not availableat the beginning of the crop year and theannual grain use is generally more stable,a ratio of current year supply and preceding year's use, hereafter referred to as asupply/use ratio, is used to measure therelative strength of supply and demandforces in different crop years. In thisanalysis, a crop year is considered to bein short (long) supply when the supply/useratio for the current crop year is below(above) the six year moving average for theratio.As shown in Table 1, crop years 1990and 1991 were short supply years for corn.To demonstrate the impact of short supply,seasonal price indices for these years areplotted in Fig 1 as PSI(90) and PSI(91).Fig 1 clearly shows that for years withrelatively short supply, price seasonalityis less pronounced and the seasonal hightends to occur earlier than in the case ofthe average supply year, as indicated byAPSI(93). In a short supply year, pricesat harvest tend to be higher and thepotential for a post harvest price increaseis much smaller.Corn price levels in the last threemonths of the marketing year (June, July,and August) are heavily influenced byPage 3expectations of the following year'scrop. As can be seen by these twoshort years, the price pattern forshort crop years can deviate greatlyfrom the average supply year. Ifthe following year's crop isexpected to be short, prices stayhigh or even rise (as in 1990). Ifthe following year's crop isexpected to be normal, pricesdecline (as in 1991).Based on the current information on supply conditions, my bestguess is that the price pattern for1993 will be similar to the patternfor 1991. Monthly S.D. corn pricesfor 1993 are projected based onassumptions that S.D. corn price forSeptember 1993 averages at $2.00 perbushel and the seasonal pattern for1993 is similar to that for 1991.Monthly projections for 1993,hereafter referred as ModifiedProjected Prices or "MPP", areplotted in Fig 2. Accordingly tothese projections, S.D. corn pricesare expected to drop by 5<? inOctober 93, and then increase by 170by February 94. The average S.D.corn price in February 94 isexpected to be 120 per bushel higherthan the September 93 level.The corn price pattern beyondFebruary 94 will be influencedstrongly by the outlook for the 1994crop. If 1994 is expected to be anormal crop year, projectionsreflected in MPP will hold.Accordingly, by March 94, the S.D.corn price will increase by about160 over the September 93 price,remain near that level until May 94,and then drop sharply. If 1994 isexpected to produce a short crop,S.D. corn prices may show someincrease during the last threemonths of the year (recall PSI(90)in Fig 1) .For comparison, averageprojected monthly S.D. corn prices(APP) for 1993 based on index valuesfor APSI(93) were computed andplotted in Fig 2. Along with thesemonthly price projections, onestandard deviation interval isplotted in Fig 2. One standarddeviation around the proj ectedFig 1: S.D. Corn Price Seasonality(Average v/s Short Supply Years)L120-|115-110-Xn) 105-"O<i)100-o95-90-85-ao-lSep Oct Nov Dec Jan Feb Mar Apr May Jun Jul AugAPSI(93) PS! (90) PSI(91)Fig 2; S.D. Corn Price Projections(Crop Year 1993)2.602.502.40(U.c(n 2.303mk. 2.20(Un2.10cncd75 2.00Q-1.901.801.70APP APP+STD-| rSep Oct Nov Dec Jan Feb Mar Apr May Jun Jul AugAPP-STD MPPTable 1. Com Supply/Use Ratio in U.S.Crop SupplyAJse Ratio a/ Supply/Use RatioYear (6 Yr Moving Av) (for Current Year) Comment1990 144.1% 114.4% Short Supply1991 138.5% 116.2% Short Supply1992 129.3% 133.7% Long Supply1993 b/ 120.7% 111.3% Short Supplya/ Aratio ofBeginning Stocks, Current Year's Production and Importsdivided bythe preceding year's Domestic Useand Exports,b/ Based onUSDA's cropestimate released onSeptember 9,1993.Page 4Fig 3: S.D. Soybean Price Seasonality(Average v/s Short Supply Year)values gives the range of priceswhich can be expected to occur about2/3rd of the time. The projectionscontained in AFP and MPP are similarfor the period October 1993 toFebruary 1994.Monthlv Price Forecasts for SovheansAverage monthly soybeans pricesreceived by S.D. farmers are available only for the last 12 years(September 1981 to August 1993).Based on these data, monthly S.D.soybean price indices projected for1993 are shown in Fig 3 as APSI(93).These seasonal patterns for S.D.soybean prices are based on theassximption that 1993 will be anormal crop year.From to the most recent estimates for the soybean crop, however,1993 is expected to be a shortsupply year (Table 2). Other recentyears with a short supply include1990 and 1988 (Table 2). Seasonalpatterns in S.D. soybean prices forshort crop years 1988 and 1990 areplotted as PSI(88) and PSI(90).S.D. soybean prices areseasonally low in October andseasonally high in June and July.However, post harvest increase inS.D. soybean prices is much smallerthan for corn. Between Septemberand February, S.D. soybean prices,on average, show a slight decrease.During crop year 1988, a year withextremely short supply, Septembersoybean prices were about 10% higherthan the year's average, and stayedat about 3% to 5% higher than theaverage for the year until March.During 1990, a year with a slightlyshort supply, soybean pricesdecreased by about 3% betweenSeptember and December and by about4% between September and February.Based on the most recent cropestimates, my best guess is that theS.D. soybean price pattern for 1993will be between the patternsAPSI(93) and PSI(88). Monthly S.D.soybeans prices are projected basedon the assumption that a) the S.D.soybean price for September 1993averages $5.80 per bushel and b) the120-1115-110-Xm 105-•nr(U100-uk_Q. 95-90-55-ao-*1 i1 f—it :1 It :1 1t :5L1 1: 1i :h -fl1 Mi 11s \ 1r \ j-*— 1 1 1 1 1 1 11 \J1 1 'Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul AugAPS! (93) PSI(aa) PSI(90)Fig 4: S.D. Soybean Price Projections(Crop Year 1993)(U.E(/}3mL.(UQ.i2JOo•5.ao-Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul AugAPR APP-l-STD APP-STD MPPTable 2. Soybeans Supply/Use Ratio in U.S.Crop Supply/Use Ratio a/ Supply/Use RatioYear (6 Yr Moving Av) (for Current Year) Comment1988 114.2% 89.5% Short Supply1989 119.5% 126.1% Long Supply1990 120.0% 115.9% Short Supply1991 117.6% 126.1% Long Supply1992 115.9% 121.4% Long Supply1993 b/ 113.3% 100.8% Short Supplya/ A ratio ofBeginning Stocks, Current Year's Production andImportsdivided by the precedingyear's Domestic Use and Exports,b/ Based on USDA's crop estimatereleasedon September9,1993.Page 5seasonal pattern for year 1993 will bebetween the patterns for a normal year and1988 year. It is projected that soybeansprices will be about 23t per bushel lowerin October 93 compared to September 93 (seeMPP in Fig 4). By February 94, soybeanprices are expected to increase by 4thigher than the October 93 level, but willbe about 19C per bushel lower that theSeptember 93 level. After February 94, theprice will be heavily influenced by theBrazilian crop estimates and the U.S. cropoutlook for the following year, whichcannot be accurately estimated at thistime.Primarily for comparison, a second setof S.D. soybeans price projections based onthe assiimption that 1993 SD soybean pricepattern will be like APSI(93) was alsocomputed and plotted as APP in Fig 4.Along with these monthly mean priceprojections, one standard deviationinterval is also plotted. If 1993 were anormal crop year, average S.D. soybeansprices would be about It per bushel lowerin February 1994 as compared to September1993. This shows that even under a normalcrop year, on average, the storage'ofsoybeans does not pay.(Grains: ... Continued from p.l)problems. After detection of a problem,steps must be taken immediately to reducepotential shrinkage loss. Low qualitygrain requires very close attention whenstored. Many farmers consider drying andstorage costs simultaneously when makingthe sell or store decision.Storage cost examples could includeinterest using 3.5 to 9.0 percent per yeardepending on whether the CCC loan rate or aprivate loan rate is being paid. Anaverage rate of 6 percent leads to aninterest cost of 3.Ot per bushel per monthfor $6.00 soybeans. It per bushel per monthfor $2.00 corn, and 1.5t per bushel permonth for $3.00 wheat.For commercial storage, you wouldusually pay to the elevator 3t per bushelper month. In some cases, a three to fourmonth minimum is charged. The total costof commercial storage to the farmer withoutany cost of waiting lines becomes 6t perbushel per month for soybeans (3.0Cinterest), 40 per bushel per month forcorn, and per bushel per month forwheat (Table 1).On farm storage involves an in and outcharge of around 80 per bushel for corn orwheat and 130 per bushel for soybeans.After the grain is in the bin, other costsusually don't exceed hO per bushel permonth unless quality or insect problemsarise. So, with interest the cost ofstoring grain after it is in the bin runsmo per bushel per month for $2.00 corn, 20per bushel per month for wheat, and 3'^0 perbushel per month for soybeans. Waitingline costs at the elevator often offset thein and out charges of storage.Shrink from storage is minimal forwell constructed and monitored facilitiesbut you can count on h. of one percentshrink even with the best facilities. Ifthe elevator accepts 15% moisture grain atharvest and you later deliver 13% moisturegrain, this is also a cost of storage.Shrink of Ih. percent on $2.00 corn costsaround 5.Ot per bushel.As an example, the variable cost ofsix months on farm storage of corn is 8.0"?in and out charge plus 3.00 "other costs"plus 6.00 interest plus 5.00 shrink(assuming 15 to 13 percent moisture change)for a total variable cost of 220 per bushel(Table 1).Table 1. Illustrative On Farm and Coimiercial Storage Coststo the Farmer for Corn, Soybeans and Wheat: 1993-1994Grain 3-Months 6-Months 9-Honths(cents/bushel)ON-FARMCorn 17.5 22.0 26.5Soybeans 23.5 34.0 44.5Wheat 15.5 21.5 27.5COMMERCIALCorn 12.0 24.0 36.0Soybeans 18.0 36.0 54.0Wheat 13.5 27.0 40.5*Assume six percent interest and prices of $2 for corn, $3for wheat and $6 for soybeans. Shrink is calculated at twopercent for corn moisture with on-farm storage, zero forsoybeans and wheat.Carry (change in futures price fromnew crop December futures to May futures)in the futures market indicates whethergrain storage may be profitable of not. Asof this writing, the carry for six months-of corn storage is 180 per bushel. SinceSOUTH DAKOTA STATE UNIVERSITYEconomics DepartmentBox 504ABrookings, SD 57007Address Correction RequestedNon-profit Org.U. S. PostagePAIDBrookings, S. D.Permit 24Pajxe 6this amount is less than the cost ofstorage, basis improvement would have tooccur in order for corn storage to beprofitable this year. Often corn basis"improves after harvest by more than the 4Cthat variable cost of storage exceedscurrent carry. Use this method to evaluateyour personal storage opportunities for1993 harvested grain. The costs in thetable represent the amount the price ofyour grain must increse before a profit tostorage is realized.•k-k-k-k-k-k-Ji-k-k-k'ifick-kifJtifJfic-k-k-k-k-k-k'k-k-k-k-Jc-JfJtifJc-Ji-A'fc'Ji'Jc'k'ic'Sc-kECONOMICSCOMMENTATOREDITOR: Donald C. Taylor, Agricultural EconomistECONOMICS DEPARTMENTSouth Dakota State UniversityBox 504ABrookings, SD 57007Phone: (605) 688 - 4141475 copies of this newsletter were produced at a costof less than $100

Seasonality In Corn and Soybean Prices Received By South Dakota Farmers; Grain: Sell or Store

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Seasonality In Corn and Soybean Prices Received By South Dakota Farmers; Grain: Sell or Store

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