# Updating Price Benchmarks

Looking ahead to the 2015 crop-year requires updating price benchmarks.  Past values are just those — in the past. Forward looking futures markets can be used to generate price expectations for the upcoming year. Another benefit of using forward-looking futures markets is that they are actively being traded, meaning prices are real.

Looking up harvest futures prices, for example for December 2015 corn, initially provides the current price being traded. Understanding probabilities of where prices could end up, which should lead to discussion of framing price expectations, requires a few more calculations.  Using option prices, days to expiration, and the risk-free rate of return, we fit a normal distribution, which allows us to calculate harvest price probabilities. Corn, soybean, and wheat prices are analyzed using this method.  To calculate a cash price the reader must remove basis from the prices provided.

## Corn Prices

Figure  1 portrays the corn price probability distribution using December (harvest) futures.  Probabilities reflect corn prices on December 1, 2015. Probability is on the vertical axis and prices are on the horizontal axis. The curve maps probabilities to prices. The median price (or 50% chance of being above or below this value) is a bit over \$4/bushel. Prices coming from low probability events, especially those on the low price side, are the most important because of their negative impact crop revenue.

There is a 10% chance that corn on December 1 will be below \$3/bushel. There also is a 10% chance that corn on December 1 will be above \$5.60/bushel. Figure 1 provides guidance on the range of December corn futures come December 1, 2015.  Variability exists, however, the probability of less than \$2 or more than \$7 corn is low and should not be expected. Crop insurance and farm bill programs will minimize impacts from corn selling at less than \$2/bushel, and paying more income taxes will take away from realizing prices above \$7. Higher prices would likely mean there had been a significant, yield-lowering drought. Prices are likely to hang between \$3.40/bushel and \$5/bushel from now to harvest.

## Soybean Prices

For soybeans the same procedure that was used in corn is followed.  Probability distribution reflects prices coming from November 2015 soybean futures (Figure  2). The figure shows a 10% chance that soybean prices will fall below \$7.80/bushel on November 1 and a 10% chance that soybean futures will be above \$12.50/bushel.  Soybean futures prices are expected to hang between \$8.75 and \$11.50.

## Wheat Prices

For wheat the probability distribution reflects prices coming from July 2015 Kansas City wheat futures (Figure 3). It indicates  a 10% chance that wheat prices will fall below \$4.50/bushel on July 1 and a 10% chance that wheat futures will be above \$7.50/bushel. Wheat futures prices are expected to hang between \$4.80 and \$6.75.

Cory Walters
Nebraska Extension Crop Economist

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