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RP Base Prices Are Key Market Barometer

The futures market is all about numbers, especially when a series of weekly, monthly and quarterly USDA reports could sway price movements. But one key number emerged this year that speaks volumes about what the market really thinks about all the data.

New crop soybeans offered premiums to the base prices used in popular Revenue Protection crop insurance contracts, while corn and spring wheat did not. This, as much as anything, illustrated the uncertainty over production that hunh over the market as the final days of planting approached.

December futures closed over its base price of $5.65 only twice during the planting season, both days at the end of May. Though some ground likely won't get planted as originally intended, the big increase in acreage planned by producers should assure a big crop anyway, unless damaging weather emerges during the rest of the growing season.

A move over the base price would give growers more incentive to keep planting corn, or even add acres. The bonus must grow with each passing day after prevented planted deadlines in corn policies passed in late May and early June, which knock 1% each day off coverage levels.

USDA's June 12 crop report put production at 14 billion bushels, which would boost projected corn carryout near 2 billion bushels. While many would argue that both numbers are too high, so far it's clear the corn market has plenty of cushion to absorb lower acreage when the agency updates its projections June 28.

USDA June 12 made no changes to its record production estimate for soybeans of 3.39 billion bushels, leaving the forecast of acreage and yield unchanged. The ability of November futures to close above its RP base price of $12.87 every day in the first half of June suggests the market still thought some incentive was needed to convince farmers to keep planting as many beans as possible. Prevented planted deadlines for soybeans began to pass June 10 and will be completely in place over the Midwest by June 30.

USDA also maintained its forecast for spring wheat production, despite problems faced by farmers in the key state of North Dakota. While some ground there won't get planted, Minneapolis September futures stayed well below the $8.44 RP base price. Overall U.S. production of wheat should be adequate, with world inventories also more than enough to satisfy demand. Despite problems on the northern Plains, futures in Kansas City made new lows, with Chicago and Minneapolis contracts also weak.

Corn prices appear to have ended endured a challenging planting season by holding within their 50-cent December futures trading range of the past four months. The new crop contract was unable to hold its gap higher after Memorial Day, an indication that this first phase of the growing season market is complete.

Warm, wet conditions forecast for the last half of June could produce a test of the bottom of the range, with the make-or-break window of pollination providing the best hope for rallies. Much of the crop will be pollinating at the same time, and unless forecasts turn hot and dry it will be difficult to generate much buying interest.

To be sure, there will be plenty of talk at the end of summer about the potential of damage from even a normal first freeze. But that likely will mean bulls are grasping at straws, trying to salvage positions – and their pride.

The market should wait to see USDA's June 28 acreage and stocks data before any decisive break. But producers should be prepared for lower prices. Revenue Protection crop insurance may be an adequate backstop for producers who bought enough coverage. Selling now, with the market below the base price, increases risk if prices rise or yields fall, but just buying a put option outright will reduce the net selling price to $5 or below. Selling an out of the money put and call to lower the premium is one alternative, but increases risk if prices do rally later on weather concerns.

Soybean prices continue to offer a premium above the RP base price, and growers should make sure they've taken advantage of the opportunity to cover at least bushels above their insurance guarantee. Increasing protection up to 40% is warranted, because November futures have tendency to break early in years following big bull markets like 2012. Good weather for finishing late planting may be enough to sink prices even before USDA updates its acreage estimate June 28.

That report won't be the last word on seedings. But the market faces a vacuum until August, when USDA makes its first forecast of 2013 production based on surveys with farmers and infield sampling. Old crop futures should continue to provide plenty of fireworks along the way as the market rations tight supplies and encourages imports. But speculative hedge funds have bullish bets on the books. If they head for the exits at the same time, futures could get chaotic quickly.

Those funds could spark a rally in November if old crop positions are moved to new crop, with chart targets above the market at $13.50 and $14.10. But funds may look elsewhere for opportunity without acreage or weather concerns.

Wheat prices remain seasonally weak as the market searches out harvest lows. USDA's June 12 report made a small reduction to 2013 crop carryout thanks to stronger exports, but the increase in winter wheat production found by the agency kept changes to a minimum.

Hard red winter wheat growers face a decision about what to do with unpriced inventory, and they face it quickly. The harvest price for HRW crop insurance contracts is being set now, with the average for Kansas City July futures in June so far around $1.45 a bushel below the RP base price from last fall. That should help cushion the blow from lower prices, but it won't guard against a market that keeps heading south. In the year after a bull market futures normally recover a little after harvest. But rallies if they happen typically don't last past mid-July. Basis levels in many areas are above average, which could make selling off the combine a better alternative than holding and hoping. Deferred K.C. futures offer around 23 cents carry to December, enough to pay for interest and handling costs for on-farm storage, but not much more.

Soft red winter wheat growers could be looking at an even bigger RP payout after their harvest price is set at the end of July. But basis could take a big hit as cash wheat is dumped in late summer to make way for what could be a very large corn crop.