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 24, 1999

Selling, Storing, LDPs and Risk Management

Corn harvest is moving rapidly in the area. Should you store this corn or go ahead and sell it? Thursday's (9-23-99) Central Missouri cash corn bids averaged near $1.69. The LDP, for most Central Missouri counties, is $0.27. The LDP provides price support and results in a net price near $1.96 ($1.69 cash price plus $0.27 LDP) if you sell the corn.

There are three marketing reasons for storing corn (a fourth reason might be income tax management but that isn't marketing): capturing basis gain, capturing market carry or speculating on higher prices. Marketing risks associated with storing include lower prices, weaker than expected basis and storage costs. You should expect gains from basis, carry or higher prices to offset the cost and risks if you choose to store.

What is the market offering for storage now? March corn closed at $2.20 on Thursday. The current Central Missouri Basis of nearly minus forty cents is very weak, but it is similar to last year--which strengthened to minus twenty cents by late January or early February. Assuming a similar pattern this year, this translates into a late January cash price of about $2.00. Using commercial storage charges of three cents per bushel per month and an interest rate of 9.5%, storage costs would amount to seventeen cents by late January. This results in a net price of about $1.83. In this case, storing nets less than selling!

Doesn't the LDP protect against lower prices? Waiting to take the LDP does protect against lower cash prices. However, when basis strengthens (cash prices rise relative to futures prices), the relative increase in cash price reduces the LDP if futures prices don't decline. With a January cash price of $2.00, there would be no LDP and you only net $1.83 in this example. You get the basis gain, but lose the LDP since both are tied to the cash market.

What happens if you store the corn and take the LDP now? Adding the current $0.27 LDP to the expected net storage price of $1.83 produces raises the expected net price to $2.10. It might even be more if futures prices are higher in January. "But wait a minute! Isn't this about the same strategy that got everyone in trouble last year with soybeans?" That's true, it is. Taking the LDP and continuing to store removes the downside price protection the LDP offers. To protect against this possibility, you could buy a $2.20 March corn put option for about $0.10 premium. Any futures price losses would be offset by the put option. This gives a price floor of about $2.00 ($2.10 net price minus $0.10 put premium) along with the potential to gain if corn prices go up.

It's no longer just a question of whether to sell or store. You have to analyze complex market factors, understand a variety market tools, make sales decisions and manage risk. This leads to a wide range of possible strategies. In this example, taking the LDP and managing price risk with a put option is one way to turn a questionable storage decision into a more attractive alternative. The LDP provides additional marketing opportunities; it also makes things a lot more complicated!

-- Melvin


University of Missouri ExtensionDecisive Marketing - September 24, 1999
http://outreach.missouri.edu/agconnection/DCT/DM990924.html -- Revised: April 20, 2004
breesm@missouri.edu