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"Many producers will want to consider a combination of
strategies depending on storage availability and cost and cash
flow needs," said Darrel Good.
"The loan certification program is available for those who face
payment limitations."
Good's comments came as he reviewed the corn market where a
number of factors have combined to push corn prices to a low
level and produce a very weak basis in most areas. This
combination generally favors storage of the 2005 crop.
"Low prices and a weak basis have resulted from relative large
carryover stocks of 2004 crop corn, a larger-than-expected 2005
crop, increased transportation costs, and the interruption to
export movement through the Louisiana Gulf port," said Good.
"The average cash price in central Illinois on Sept. 16 was
$1.69 per bushel, equal to the marketing year low reached in
early November last year.
"That price reflects an average basis of minus 37 1/4 cents. The
basis is about 16 cents weaker than at this time last year. The
contract low for December 2005 futures has been $2.055, 14 1/2
cents above the contract low for the December 2004 contract."
Cash corn prices are expected to continue to drift lower as
harvest progresses, particularly if the USDA's October Crop
Production report contains a larger forecast of the size of the
current harvest, Good noted.
"The low prices and weak basis are generally a signal to store
as much of the crop as possible, depending on availability and
cost of storage," he said. "In years of large crops, the central
Illinois cash price has generally reached a marketing year low
during harvest and a marketing year high in the spring/summer
after harvest, with the high typically being 60 to 70 cents
above the harvest low.
"Last year, for example, the average cash price--overnight
bid--reached a low of $1.695 on Nov. 4, 2004 and a high of
$2.395 on July 18, 2005. The increase reflected a 29-cent
increase in futures prices and a 41-cent strengthening of the
basis."
Good added that the strong tendency for cash prices to recover
significantly from harvest lows in large crop years has a lot of
producers planning to establish the loan deficiency payment
(LDP) sometime in the harvest window and store the crop unpriced
to capture the seasonal recovery expected by spring.
"That is an acceptable strategy for part of the crop, but there
are a number of reasonable alternatives to consider as well," he
said. "Here are some examples."
The current weak basis and relatively large carry in the corn
futures market (deferred contracts higher priced than nearby
contracts) offers producers with low-cost storage an opportunity
to establish the LDP after the crop is harvested and to store
the crop priced for later delivery, he said.
"That is, a large portion of the typical season recovery in cash
prices is already reflected in deferred futures and can be
captured by forward pricing," Good said.
On Sept. 16, for example, the average price for corn delivered
in January 2006 was $1.90, 21 cents above the spot cash price.
Corn that can be stored for less than 21 cents could be priced
for January delivery. The LDP could be established any time
before delivery. If established now, at 44 cents per bushel, the
January sale would result in a price of $2.34, minus storage
costs.
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"Establishing the LDP now would take advantage of the fact that
the LDP is 44 cents larger than expected, given an average cash
price of $1.69," said Good. "The net of $2.13 is about 10 cents
above the average loan rate in central Illinois. That 'premium'
over loan value has been diminishing and may disappear if the
local basis continues to weaken.
"Where storage is not available, or is expensive, establishing
the LDP and selling corn at harvest is currently a reasonable
alternative."
Forward pricing for delivery in the spring of 2006, rather than
January, may be warranted, depending on storage costs and basis
expectations. On Sept. 16, July 2006 futures settled at $2.32.
Even if the July basis strengthens to only minus-16 cents by May
2006, as it did this past year, selling July futures at $2.32
would result in a gross price of $2.16, 26 cents above the
current January 2006 price and 47 cents above the current spot
cash price.
"Another alternative is to store some of the crop unpriced, but
under loan rather than establishing the LDP," said Good. "This
strategy manages the risk of prices going lower, rather than
higher, after harvest. The marketing loan gain, if any, could be
established anytime--within nine months--after the loan is
established. The crop could be priced at that time or continue
to be held in storage unpriced."
For producers who want to capture the current LDP and a portion
of the carry in the market, but believe there is some chance
that corn prices will recover significantly more than reflected
by the current carry in the market, they could store the crop
and hedge the price by buying put options.
"July 2006 put options with a $2.30 strike price had a premium
of 15 1/4 cents on Sept. 16," said Good. "Owning those options
would allow the producer to sell July futures at $2.30 any time
before the options expire next June."
If the basis strengthens to minus-16 cents by June 2006, this
strategy would result in a minimum price of $1.98 3/4 (which
represents $2.30 minus 16 cents minus $1.52 1/2) minus storage
costs.
"If July futures move higher, the options could be allowed to
expire--or sold for any remaining time value--and corn sold at a
higher price," said Good. "Due to the large carry in the market,
storing the crop and buying put options is preferable to selling
the crop and buying call options, if low-cost storage is
available."
[News release]
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