"The relevant pricing alternatives to
consider are influenced by a number of factors, including the
portion of the crop already priced, the magnitude of storage costs,
the relationship between the local cash price and the posted county
price, the magnitude of price premiums for later delivery, the
willingness to use futures and options contracts, and the general
outlook for post-harvest price direction," said Darrel Good.
Using prices relevant to central
Illinois as an example, Good examined some of the alternatives.
For corn, the following prices reflect
conditions on Sept. 20 -- spot cash price of $1.95, Commodity Credit
Corporation loan rate of $2.03, posted county price of $1.89 and
premiums for January delivery over harvest delivery of 15 cents.
"One strategy is to establish a loan
deficiency payment of 14 cents and sell corn for $1.95, for a net
price 6 cents above the loan rate," said Good. "A second strategy is
to store unpriced corn with downside price protection provided by
the CCC loan rate. The net price of this strategy depends on the
direction and magnitude of future price changes. The strategy does
establish a minimum price of $2.03 minus storage costs incurred
until the crop is sold."
For commercial storage, Good said, the
cost includes storage charges, any additional drying and shrinkage
charges below 15 percent moisture, and interest on the value of the
stored crop. For on-farm storage, the cost includes cost of handling
the crop in and out of the storage facility, handling and storage
shrinkage, cost of drying below 15 percent moisture, interest on the
value of the crop, and any quality deterioration during storage.
"Interest cost could likely be avoided
in both instances by placing the crop under CCC loan," said Good.
A third alternative is to establish the
loan deficiency payment at 14 cents and store the crop unpriced. The
net price from this strategy is the eventual selling price plus 14
cents minus accrued storage costs. No downside price protection is
"One variation of this strategy is to
store the crop unpriced, establish the LDP later if further price
weakness is expected in the short run and to continue to store the
crop unpriced in anticipation that prices will eventually move
higher," said Good. "A second variation of this strategy is to store
the crop unpriced and lock in the LDP rate, now or later, for a
period of 60 days. If the 60-day period elapses without action, the
crop remains eligible for future loan benefits."
A fourth alternative is to establish
the loan deficiency payment at 14 cents and sell corn for January
delivery at $2.10, yielding a net price of $2.24 minus storage
costs. In this example, the strategy is viable only if the cost of
storage is less than the 15-cent premium for January delivery.
Good said a fifth alternative is to
store the crop and price it for future delivery (contract or hedge)
and then establish the loan deficiency payment before delivery. This
strategy might be considered if the loan deficiency payment is
expected to increase before delivery and the current forward price
exceeds the spot price by more than the cost of storage. It
establishes a price equal to the current price for future delivery
minus the cost of storage until delivery, plus the future loan
[to top of second column in
For the soybean examples, the following
prices reflect conditions as of Sept. 20 -- spot cash price of
$5.20, Commodity Credit Corporation loan rate of $5.18, posted
county price of $5.44 and the premium for January delivery over
harvest delivery of 15 cents. One strategy is to sell soybeans for
$5.20, 2 cents above the loan rate.
"A second strategy is to store soybeans
and price for future delivery if the premium for future delivery
exceeds the cost of storage," said Good. "If the posted county price
moves below the loan rate prior to delivery, an LDP could be
established. A third strategy is to store soybeans unpriced in
anticipation of higher prices.
"This strategy essentially establishes
the loan rate minus storage costs as a minimum price, if the posted
county price is near the actual cash price. In this example, the
posted county price is currently well above the spot cash price, but
that difference will likely fade as harvest progresses."
An additional alternative for both corn
and soybeans is to establish the loan deficiency payment, sell the
crop for immediate or future delivery, and replace the cash position
with futures or call options. If the crops are sold for future
delivery, loan deficiency payments could be established anytime
before delivery, if available.
"Once the crop is delivered, it is no
longer eligible for loan benefits," said Good. "In general, this
strategy might be considered if storage is not available or if the
cost of storage exceeds premiums for future delivery. Options are a
more expensive alternative than futures due to the premiums
associated with buying call options but provide some protection if
prices decline further. A number of option spread strategies could
be employed to manage the cost and yet establish some price
It is recommended that producers become
familiar with the rules associated with the Commodity Credit
Corporation loan program.
particular, the criteria for establishing beneficial interest, the
procedure for establishing multiple loans and the rules for
determining the order in which loans are repaid should be reviewed,"
of Illinois news release]