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.
October 22, 1999

Maximizing the LDP

Today's LDPs (loan deficiency payments), for most of Central Missouri, are $0.97 per bushel for soybeans and $0.28 for corn. Many market analysts and newsletter services have been recommending taking the LDP on both corn and beans. At the same time, they are not recommending any additional cash sales and believe both crops should go into storage. This is a speculative strategy for using the market loan program originally designed to serve as price insurance or a price support role. Is this a good idea?

The reasoning behind this strategy is that corn and soybean prices are at or near their harvest lows (Central Missouri cash bids [10-21-99] range $4.30 to $4.60 for soybeans and $1.60 to $1.80 for corn). While large supplies are expected to keep a lid on prices, many market analysts expect some price recovery from these levels. Taking the LDP at the lows and then selling the grain after prices recover results in a higher net price. This strategy attempts to "make the best of a bad (low price) situation!"

Taking the LDP now also attempts to take advantage of weak basis. The posted county price (PCP), used to determine the LDP, is calculated from the cash market. A weak basis results in lower cash prices and a larger LDP. As basis improves, cash prices increase relative to futures prices and the LDP shrinks--unless futures price declines offset improving basis. Collecting the LDP when harvest pressures prices and basis is weak attempts to maximize the LDP.

It is important to understand that collecting the LDP and continuing to store the grain is a speculative strategy! It assumes the risk associated with lower prices. Many soybean producers learned this lesson the hard way last year (1998). They collected the $0.30 to $0.52 LDPs, offered early during harvest, and continued to store the soybeans well into 1999. Prices fell and storage costs continued to add up, resulting in net prices well below $5.00. However, this didn't happen to everyone. Those who collected the early LDPs and sold their soybeans on higher prices in November 1998 received net prices approaching $6.00!

It all comes down to accepting and managing risk. The LDP was designed to support prices at the loan rate, if cash sales are made. The CCC market loan provides "price insurance" at loan rate if stored grain is placed under loan. Collecting the LDP and forgoing the loan, while storing the grain, assumes the risk of lower prices and it is important to understand and manage this risk. It is very risky to collect the LDP and plan on storing the grain for a long period of time. For example, avoiding cash sales for the remainder of the year (because of taxes) adds greatly to the risk of this strategy. Last year's only opportunity to make this strategy work, for soybeans, occurred following harvest and prior to end of the year. Trying to maximize the LDP requires watching the markets closely and being prepared to move the grain at any time. The strategy has potential and don't dismiss it because it because of last's year's mistakes, but it is important to recognize and deal with the risks associated with it.

-- Melvin


University of Missouri ExtensionDecisive Marketing - October 22, 1999
http://outreach.missouri.edu/agconnection/DCT/DM991022.html -- Revised: April 20, 2004
breesm@missouri.edu