Farm Management Specialist
University of Missouri Extension
|December 3, 1999
Risk of Storing Soybeans
It appears that producers have already taken the LDP on what is approaching one-half of the soybeans produced. Many of these beans have not been sold and are in storage.
Each year is different, but the hard lessons learned by many last year shouldn't be forgotten. Last year, many took what appeared to be attractive (30-50 cents) LDPs and then stored the soybeans for most of the year through declining prices, ending up with net prices well below $5.00. The mistake was not necessarily taking the LDP too early, it was a failure to recognize and mange the price and storage cost risks associated with long-term storage.
Storage costs can quickly add up. For example, Central Missouri cash bids for soybeans are currently about $4.50 (12-2-99). Assuming 9.5% interest and 3 cents per bushel per month commercial storage charges, it would cost $0.46 per bushel to store soybeans until July 2000. This is risking up to $ 0.46 per bushel in hopes of getting prices above $5.00. If prices remain relatively stable or decline (as they did last year), the storage costs will represent losses.
Current market signals do not suggest long-term storage profits. Central Missouri basis has strengthened to near normal levels and doesn't suggest the opportunity to capture any further gains. Market carry, storage returns offered by July futures, is only about $0.20--well short of the above $0.46 storage costs. Storing for higher prices becomes speculating on higher price levels. Are there better ways to speculate on higher prices other than storing cash soybeans?
Selling the cash soybeans and buying July futures is one alternative to storing cash soybeans. Buying the July futures contract gives up the $0.20 market carry and interest (9.5%) on margins may be $0.03 to $0.06 (or more) depending upon price action. This represents a $0.23 to $0.26 cost compared to the cost of storing cash beans of $0.46!
The price risk is essentially the same for both strategies! Storing cash soybeans or buying July futures are both speculating on higher prices. Lower prices result in reduced value of stored soybeans (equity losses) or margin calls (cash losses) on futures contracts. The net effect is the same. However, selling the cash beans captures the basis gain and eliminates the cost of storage. Eliminating storage costs reduces the amount of loss if prices decline. If prices go up, owning futures still captures most of the gain, since normal basis strengthening has already occurred. The futures strategy could also be more profitable, with higher prices, because of reduced storage cost.
Storing soybeans without the CCC loan or LDP protection is one of the most risky strategies of all. Speculating with futures, instead of speculating with soybeans in the bin, doesn't eliminate price risk. However, it does help manage and reduce other risks associated with storage. The key to profits isn't necessarily eliminating risk--it's managing risk.
Decisive Marketing - December 3, 1999