Farm Management Specialist
University of Missouri Extension
|March 12, 1999
"Making the Best of a Bad Situation"
"If you have already taken the LDP and still have your beans, what should you do?" A lot of producers are in this situation and that question has come up in almost every marketing program or discussion that has occurred in recent weeks.
Last fall, market signals suggested that soybeans should be stored and the LDP looked like a good opportunity to enhance prices. These strategies would have worked if the beans had been sold on the late fall rally (Nov-Dec), but many passed up that opportunity for a variety of reasons. Now what seemed like a good strategy last fall appears to have been the wrong thing to do! What do you do now?
Give up, sell the beans and prevent more losses? Thursdays USDA Supply and Demand Report had more negative news for soybeans -- reduced exports, increasing ending stocks and lower average prices. This, along with an expected increased soybean acreage in 99 and the potential for huge ending stocks next year, leads some analysts to believe that the price low still isnt in. Selling now takes the loss, but it also prevents taking bigger losses with lower prices and increasing storage costs.
Continue to store for seasonal price strength? Seasonal trends would suggest, and some analysts agree, that the winter price lows should be behind us. If these historical patterns hold up, prices could strengthen into early May. Assuming 9% interest rates and $.03 per month storage charges, it would only cost about thirteen cents to store $4.45 soybeans until May. It wouldnt take much of a rally to recover these costs even if the losses to date arent recovered. One problem with this strategy, especially if the beans are in bins, is the ability to move them quickly during the busy planting season.
Sell cash -- buy futures? This could be a good alternative to storing. The advantages are that storage costs are eliminated and a futures contract can be sold quickly, with only a phone call, even when youre busy in the field. There is a potential for margin losses with this strategy if prices fall, but youd have essentially the same net losses with cash beans in the bin too.
Sell cash -- buy a call option? This strategy is lower risk, but strike prices and option premiums can eat up much of the potential for gain. For example, buying an out-of-the-money August $5.00 call means that prices need to increase about $.37 just to break-even ($.12 out-of-money plus $.25 premium). This much price increase could be hard to come by without weather problems.
"Theres just no good way to do the wrong thing!" Taking the LDP, hoping to enhance price, also removes the downside price protection it offers and that seems to have been the wrong thing to do. However, wrong decisions are a part of marketing and "whats done is done." The thing to do now is look for a strategy that minimizes losses and possibly keeps you in position to take advantage of any unexpected opportunities. You might call it trying to "make the best of a bad situation!" -- Melvin
** Upcoming Marketing Programs **
"Grain Marketing Strategies for 1999"--Old and new crop marketing strategies to deal with low prices. Making sense out of market alternatives and using the LDP.
Decisive Marketing - March 12, 1999