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.
July 23, 1999

Preparing for the LDP Marketing Strategies

Have the grain markets bottomed? The failure of the grain markets to plunge lower on bearish crop news followed by strength in the last week on weather concerns has led some market analysts to believe that the markets may have finally bottomed out. If this becomes more evident, attention will shift to fall marketing strategies using the LDP (loan deficiency payment) and how to protect the LDP.

Beneficial Interest. To be eligible for the LDP, you must have beneficial interest in the commodity. This means you must have control of the commodity, you must have title to it and you must still have risk of loss of the commodity. If these tests are met, completing the proper FSA paperwork prior to harvest and delivery prepares you for collecting the LDP.

Caution, some cash grain contracts, seed grower contracts and identity preserved grain (high oil corn, food grade soybeans, etc.) may cause problems with maintaining beneficial interest and eligibility for the LDP. Most forward cash contracts are properly worded and some of the previous problems with seed grower contracts have been corrected. However, there may still be problems with some of these and especially some of the more recent identity preserved grain contracts. If you have one of these contracts and are unsure about it, contact your FSA office for a determination. If the contract makes you ineligible, it may still be possible to get an addendum to the contract to correct the problem prior to harvest. Do it now! After the grain is harvested it will be too late!

Protecting the LDP. The LDP is a risk management tool that protects a price floor at approximately loan price. It isn't meant to be a guaranteed payment. However, if the markets have bottomed and prices do begin to recover, expect to start seeing a lot of suggested strategies for "protecting the LDP." Most of these strategies will likely use call options or futures, the idea being to capture gain in the futures market to offset the decreasing LDP as prices rise. A strategy to "protect the LDP" is a really bullish speculative strategy. Buying a call option (or futures) and still owning the cash crop means you are long in both the cash and futures market or have what is sometimes called a Texas Hedge! If the market falls, the LDP only covers the cash commodity and you lose on the long futures or option position. These strategies may have merit, but make sure you understand what "protecting the LDP" means along with the risks and costs associated with the strategy.

While the markets may have bottomed, no one is expecting any big rallies yet. It still looks like the LDP or the market loan will be a significant part of fall marketing strategies. Now is the time to start preparing to take advantage of it. -- Melvin


University of Missouri ExtensionDecisive Marketing - July 23, 1999
http://outreach.missouri.edu/agconnection/DCT/DM990723.html -- Revised: April 20, 2004
breesm@missouri.edu