Column by John Fulton

Sept. 20: Logan County Commercial Corn Plot results

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[SEPT. 21, 2004]  URBANA -- As cash corn prices have declined below the Commodity Credit Corporation loan rate in many markets and cash soybean prices near the loan rate, a number of storage and pricing alternatives are available for producers, said a University of Illinois Extension marketing specialist.

"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 provided.

"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 deficiency payment.

 

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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 protection."

It is recommended that producers become familiar with the rules associated with the Commodity Credit Corporation loan program.

"In 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," said Good.

[University of Illinois news release]

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