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|Volume 3, Number 12
||This Month in Ag Connection|
The Options Option
Volatile grain prices are expected to continue for some time. Strong demand, tight corn supplies and production problems anywhere in the world are among the factors that can sharply increase prices. Asian economic problems, increasing soybean and wheat supplies and large production prospects in 1998 are examples of factors that would cause lower grain prices. These and other factors can conflict, leading to large price swings that can occur quickly.
These uncertain conditions and volatile markets make decision making especially difficult. Do you sell at a good price, or wait for still higher prices? Many producers can remember, what seemed like a good decision in early 1996, selling corn at $3.00 prices and then watching it go to $5.00. Many of these same farmers passed up $3.00 plus corn in 1997, held too long and ended up taking prices in the $2.00 range. There is always the risk of selling too quickly and missing out on higher prices. There is also the risk of waiting too long and watching prices drop sharply before sales can be made. Commodity options can be used as insurance policies to manage these price risks.
A put option can be used to insure against lower prices. A put sets a price floor. Buying a put option provides the right to sell (put it on the market) at a specified price (strike price). If prices fall, the put buyer can enter into a futures hedge at the strike price and avoid the lower prices. If prices go up, since there is no obligation to perform, the option can be ignored (let it expire) and the grain can be sold at the higher prices.
A call option can be used to insure against missing out on higher prices. A call option gives the right to reown previously sold grain (buying or calling it from the market) at a specified strike price. If prices increase, the call enables reowning the grain with a futures contract and selling at the higher price. If prices don't increase, since there is no obligation, the option expires worthless.
A call option can also be used by livestock producers to insure feed prices. Since a call option provides the right to purchase a futures contract at the stated strike price, it gives the purchaser the right to enter a purchase hedge. In this case the producer sets a price ceiling on the feed. If prices don't go up, again the option expires worthless and the feed can be purchased at the lower price.
Options aren't free. Just as insurance companies collect a premium for writing insurance, the option seller (writer) collects a premium for the option. The premium is the money the option writer gets for assuming the market risk. Insurance policy premiums get higher when the risks are higher. Option premiums also get higher in volatile markets when the risks increase. The cost of the option must be weighed against the market risk involved in making the decision to use options as price insurance.
Commodity options seem very complicated at first. There are a number of confusing terms. A basic understanding of the futures market and hedging is also necessary. However, coping with global markets, strong demand, tight supplies and uncertain production requires becoming familiar with and using a variety of marketing strategies. If you need to learn more about using commodity options contact your University Outreach and Extension regional farm management specialist or the local extension center.
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Roundup Ready Weed Control Programs
This winter and next spring you will hear a lot of people talking about how to select the best Roundup Ready weed control program. Monsanto will be telling you that there is little need to use anything on RR soybeans except Roundup Ultra®. If you have a new flush of weeds after the initial Roundup Ultra® application, then just spray again with Roundup Ultra® . They will argue that applying a soil applied product will just add to the cost of production and this will result in a reduction of the economic benefits from using the Roundup Ready technology.
On the other hand, many of Monsanto's competitors will be arguing that at least some soil applied herbicide should be applied prior to planting, or immediately thereafter. They will argue that this treatment will provide partial control of early season weeds and allow the producer a wider window to apply the Roundup.
They will argue that you should be reluctant to use a product with only one mode of action for fear of selection for additional herbicide-resistant weeds. They will suggest that the use of a low-cost, soil-applied herbicide, followed by Roundup®, will provide better and more economical control of certain weeds, like waterhemp, that have very high seed densities in a field. They will imply that even early season weed competition is detrimental to soybean yield.
Each of these arguments has merit. Anyone trying to get by with one application of Roundup Ultra® should recognize the importance of fast crop canopy development. That could mean delaying planting until the soils warm; planting into soils that allow for good seed to soil contact; narrow row spacing; increasing seeding rates; early season irrigation; and using a fungicide seed treatment for improved seedling health and vigor.
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Prepaid Farm Expenses
The types of expenditure covered by the prepaid regulations are feed, seed, fertilizer, chemicals, and similar farm supplies. The following three tests must be met for a prepayment to be deductible in the year of payment.
Under current regulations, the IRS allows, in the year of payment, a deduction for
prepaid farm supplies that does not exceed 50% of the other deductible farm expenses. The
deduction for any excess prepaid farm supplies is allowed as a deduction in the tax year
in which the supplies are actually used or consumed.
No prepayment deduction is allowed for the advance payment of interest or insurance.
Caution when entering a grain bin!!
For more information:
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Keeping Grain in Conditon
Management is required to keep grain in good condition once it is placed in storage. Because of differences in temperature between the grain in the bin and the outside air, air inside the bin migrates.
With cold outside air, the air inside the bin moves downward along the outside wall and then upward toward the center of the bin. The air that comes up through the center of the bin will carry some moisture and will contact the cool grain in the center of the bin. Moisture will then condense and cause the grain in this area to go out of condition and crust over.
The crusting will keep air from flowing through the mass of grain and will make it impossible to keep the grain in condition. To prevent this problem, grain should be cooled to about 40 F. in the fall and warmed to about 60 F in the spring. This will minimize migration of air through the bin.
Check grain weekly. Use a grain probe and a thermometer to check the temperature by probing below the surface of the grain in several places. Record these temperatures to monitor changes. Move air through the grain to determine there is a musty odor. This will reveal problems that can't be detected by inspecting the grain or checking the temperature. If problems occur, fans may need to be run to dry the grain. In some cases, grain may need to be removed from the bin.
Cover the fan intake when it is not in use to prevent air from moving through it and to minimize insect and rodent problems.
Should air be pushed or pulled through the bin?
There is no right or wrong answer it depends! If air is pushed through the grain, moisture is most likely to condense on the cold roof. This can cause some moisture problems with grain at the top of the bin. An advantage to pushing the air is if there is grain spoilage, it will most likely be at the top of the bin and is easier to detect.
When air is pulled through the bin, the moist air coming off the grain can condense on floors and on grain near the floor. This can block ducts and plug the aeration system. If you are pulling air through, you should wait until you have several feet of grain in the bin to avoid pulling fines into the duct.
Leave the fan on long enough. Anytime a drying or cooling front is started through the grain, make sure the fan is run long enough to move the front completely through the grain. When the temperature of the air coming through the grain is equal to the outside air, you are through.
University Outreach and Extension Guides on Worker Protection Standards (WPS):
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Department of Ag to Enforce Worker Protection Standards for Agricultural Pesticides
Missouri Department of Agriculture inspectors will begin monitoring to insure that growers are complying with the provisions of the federal Worker Protection Standards for Agricultural Pesticides (WPS) regulations. While department employees will continue to provide technical assistance, they will take regulatory action if they find blatant violations.
WPS is a U.S. Environmental Protection Agency regulation protecting workers using pesticides in agricultural production. These regulations require producers of farm, forest, nursery, and greenhouse products to take measures to reduce pesticide-related illness and injury among workers and family members.
Commercial applicators are also responsible, along with owners, consultants, and managers, for protecting agricultural workers.
Agricultural producers should ensure they are in compliance by first becoming familiar with the regulation. There are several specific requirements to comply within these standards. Producers must make sure their employees are properly trained in pesticide handling, follow requirements for worker notification of recent applications, and provide personal protective equipment (PPE), decontamination materials, and emergency assistance.
New pesticide labeling, required since 1993, indicates if a pesticide is affected by WPS. WPS information on the new labeling includes PPE for pesticide handlers and early-entry workers and restricted-entry intervals (REI). If pesticide labeling refers to WPS, users must comply with these regulations. Other assistance and information may be obtained from the Missouri Department of Agriculture, Bureau of Pesticide Control, P.O. Box 630, Jefferson City, MO 65102 (573) 751-2462.
Author: Jim Jarman, Agronomy Specialist
Connection - December 1997
http://outreach.missouri.edu/agconnection/newsletters/is-97-12.htm -- Revised: September 30, 2002