Taking Advantage of Corn LDPs
Compiled by staff
Published: Sep 21, 2004
As cash corn prices have declined below the Commodity Credit Corporation (CCC) loan rate in many markets, a number of storage and pricing alternatives are available for producers, says a University of Illinois Extension marketing specialist.
"The relevant pricing alternatives to consider are influenced by a number of factors, including the portion of the crop already priced, the magnitude of storage costs, the relationship between the local cash price and the post county price, the magnitude of price premiums for later delivery, the willingness to use futures and options contracts, and the general outlook for post-harvest price direction," says Darrel Good.
For corn, the following prices reflect conditions on Sept. 20--spot cash price of $1.95, CCC loan rate of $2.03, posted county price of $1.89, and premiums for January delivery over harvest delivery of 15 cents.
"One strategy is to establish a loan deficiency payment (LDP) of 14 cents and sell corn for $1.95, for a net price six cents above the loan rate," says Good. "A second strategy is to store unpriced corn with downside price protection provided by the CCC loan rate. The net price of this strategy depends on the direction and magnitude of future price changes. The strategy does establish a minimum price of $2.03 minus storage costs incurred until the crop is sold."
For commercial storage, Good says, the cost includes storage charges, any additional drying and shrinkage charges below 15% moisture, and interest on the value of the stored crop. For on-farm storage, the cost includes cost of handling the crop in and out of the storage facility, handling and storage shrinkage, cost of drying below 15% moisture, interest on the value of the crop, and any quality deterioration during storage. "Interest cost could likely be avoided in both instances by placing the crop under CCC loan," says Good.
A third alternative is to establish the LDP at 14 cents and store the crop unpriced. The net price from this strategy is the eventual selling price plus 14 cents minus accrued storage costs. No downside price protection is provided.
"One variation of this strategy is to store the crop unpriced, establish the LDP later, if further price weakness is expected in the short run, and to continue to store the crop unpriced in anticipation that prices will eventually move higher," says Good. "A second variation of this strategy is to store the crop unpriced and lock in the LDP rate, now or later, for a period of 60 days. If the 60-day period elapses without action, the crop remains eligible for future loan benefits."
A fourth alternative is to establish the LDP at 14 cents and sell corn for January delivery at $2.10, yielding a net price of $2.24 minus storage costs. In this example, the strategy is viable only if the cost of storage is less than the 15 cents premium for January delivery.
Good says a fifth alternative is to store the crop and price it for future delivery (contract or hedge) and then establish the LDP before delivery. This strategy might be considered if the LDP is expected to increase before delivery and the current forward price exceeds the spot price by more than the cost of storage. It establishes a price equal to the current price for future delivery minus the cost of storage until delivery, plus the future LDP.
"It's important to build a continual customer relationship so they can see our system firsthand and be assured that we know how to maintain quality and purity in food grade soybeans," Fee says.
During the farm tour, Fee says the Japanese team asked many questions about the quality and yield potential of this year's soybean crop. Some were concerned there might be a repeat of the short supply and higher priced soybeans that occurred in 2003. The tofu makers were also interested in the decision-making process U.S. farmers use when deciding whether to raise GM or non-GM crops and what type of incentives would be needed to encourage more farmers to raise non-GM.
"They were very interested in why I would grow one type of crop over another," Fee says. "We talked about what triggers and instigates farmers to make these growing decisions. It was a valuable discussion for me as a grower and for them as buyers of our product."
The American Soybean Association, the United Soybean Board and USDA's Foreign Agricultural Service arranged the Japanese food bean tour.
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Tagged: soybean, farm, soybeans, Harvest, usda
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