Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
September 1, 2000

Higher Is Not Better??

November soybean (futures) prices slipped to nearly $4.45 again in early August. On Thursday (8-31-00) November soybeans had rallied nearly sixty-cents to $5.05. Most agree prices have been too low. A sixty-cent rally is good--isn't it? Actually a pre-harvest rally may not help much, especially if prices stay below the loan rate.

For those who plan to sell out of the field at harvest, it really doesn't make much difference because of the LDP (loan deficiency payment). The LDP essentially supports price at the county loan price, assuming the posted county price (PCP) is about the same as local cash price. When prices are below loan rate, any price gains are offset by a shrinking LDP and the net price remains near loan price.

For some marketing strategies, a price increase could be bad! This could apply to those who have forward contracted early in the year or for those who plan on storing to capture basis and price gains. Darrel Good, University of Illinois Extension Economist, points out, "a pre-harvest price recovery that keeps prices below the loan rate would likely result in lower net income than a post-harvest rally." For either of these strategies, a lower price going into harvest produces a larger LDP. The larger LDP added to a favorable cash contracted price or added to basis and price gains on stored grain results in a higher net price. If prices rally early (such as they are now), the LDP will shrink and reduce potential gains.

For example, look at a situation assuming soybean harvest prices near the November contract low of $4.45. If Central MO basis is a minus $0.35, cash prices would be about $4.10. Assuming the PCP nearly equals the cash price, the LDP would be $1.10 with a county loan rate of $5.20 ($5.26 national loan rate). Selling out of the field would net $5.20 ($4.10 cash + $1.10 LDP). A producer who forward contracted early in the year for $5.00 or more would net more than $6.00 ($5.00 cash contract + $1.10 LDP). For those planning to collect the LDP and store the beans for basis and price gain, they would have $1.10 to add to whatever the post-harvest rally provided.

Now look at the same example with $5.05 November soybean prices at harvest. Cash price would be $4.70 ($5.05 futures - $0.35 basis). This is still below loan rate, but the LDP would have shrunk to $0.50 ($5.20 loan price - $4.70 PCP). The net harvest sale price would still be about $5.20 ($4.70 cash price + $0.50 LDP). While it would still be better than a harvest sale, the producer with a forward contract might now be well below a net price of $6.00 ($5.00 cash contract + $0.50 LDP = $5.50). Those planning to collect the LDP and store would now only have $0.50 to add to any storage return in addition to greater downside price risk.

When prices are below loan price, the LDP was designed to provide price support. Everyone soon learned that it could also be used in speculative strategies to enhance prices. However a sixty-cent pre-harvest price rally, when prices are below loan rates, can produce disappointing results. --Melvin


University of Missouri ExtensionDecisive Marketing - September 1, 2000
http://outreach.missouri.edu/agconnection/DCT/DM000901.html -- Revised: April 20, 2004
breesm@missouri.edu