Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

Decisive Marketing

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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.
November 5, 1999

Help, What Do We Do?

"Harvest is over. The grain is in the bin. Now we need a lot of help in deciding what to do!" That quote from one producer probably sums the situation for many of you. Low prices and uncertain outlook. LDPs or CCC loan? Store--how long? The GMO issue. The issues are complicated and there are many possible strategies--none of which produce prices that anyone gets excited about. But these low prices make the cash situation very tight and you need to do the best you can. Where do you start?

There is no single market strategy that is best for everyone. Some of you need cash soon while others can wait longer. In some cases, current prices with the LDP and government aid may "cash flow." In others, they won't. If your cash situation is tight, then risk also becomes very important. The simple answer is that there is no simple answer--you must sit down and "pencil out" the alternatives.

How do you do this? Let's look at yesterday's (Thursday 11-4-99) corn market. Central Missouri cash bids ranged $1.71 to $1.93--averaging about $1.81. Add in the LDP (if you haven't already taken it) of $0.22 and your net price would be about $2.03. This price, while in the upper half of USDA's projected price range, may not offer much in the way of profits (especially where yields were low this year) and you may want to avoid sales because of taxes. But his provides a "starting point" for making decisions. What else could you do? Would other strategies be better or worse?

If you continue to store, storage costs will add up and you have the risk of lower prices. What about taking the LDP and forward contracting for January delivery? Yesterday's Central Missouri cash bids for January were about $1.90 ($1.75-$2.05). Add in the LDP and you get $2.12 ($1.90 plus $0.22). This eliminates downside price risk and you improve your net price. However, this net price will be reduced somewhat by the cost of storing until January and you could miss higher prices because you're sold out.

What about re-owning with a call option? July corn futures were about $2.24 yesterday and a $2.20 (strike price) July call option had a premium (cost) of $0.15. The call premium compares favorably as an alternative to the cost of storing cash corn until late spring. Suppose you take the LDP, forward contract for January delivery and buy the July call. Your floor price (the worst you'd do) is about $1.97 ($2.12 minus $0.15 premium), depending upon your storage costs until you deliver the corn. This strategy would allow you to capture higher prices into spring--if they occur. This strategy also compares favorably to using the CCC loan (another possible strategy to consider) and, after January, you wouldn't have storage costs or loan interest payments if prices rise significantly above loan rate.

These are selected examples of several possible strategies. Timing (when you sell the cash grain, collect the LDP or purchase the call option) also affects the outcome. It's a complicated situation with many possible alternatives and outcomes. You have to consider the risk, take the time to figure each strategy out and then try decide which best fits your situation. Wish I could say it's easy, but it isn't!

-- Melvin


University of Missouri ExtensionDecisive Marketing - November 5, 1999
http://outreach.missouri.edu/agconnection/DCT/DM991105.html -- Revised: April 20, 2004
breesm@missouri.edu