July 31, 2000
HARVEST PRICING STRATEGIES FOR
CORN AND SOYBEANS
While surprises can occur, it now
appears that corn and soybean prices will remain well below the
loan rate through harvest again this year. If so, harvest time
pricing strategies will be centered around the use of the marketing
loan program. Strategy selection will be influenced by the availability
and cost of storage, the magnitude of the spot and forward basis,
willingness to use various pricing tools, extent to which the
posted country price tracks the local cash price, and payment
limitation considerations. The primary objective will be to implement
strategies that will generate a net price in excess of the Commodity
Credit Corporation loan rate, without undue risk of a net price
below the loan rate.
Availability of permanent storage
space may be a problem in areas with unusually high average yields.
Some merchants anticipate that 15 to 20 percent of the off-farm
storage in those areas will have to be in temporary facilities.
All of those facilities will not qualify for warehouse receipts.
The large crop may also keep basis levels very weak and corn futures
spreads large. If so, premiums for later delivery will remain
attractive compared to harvest bids, even if commercial storage
charges are increased. Unless Congress makes a change, the limit
for loan deficiency payments and marketing loan gains will be
$75,000 for crops produced in 2000.
There are several strategies that
might be considered for the harvest period. If the basis remains
weak and the premium for later delivery is large, producers might
establish he loan deficiency payment (LDP) on a portion of the
crop and forward price for later delivery. This strategy requires
that the posted county price (PCP) tracks the local cash bid fairly
closely and that the premium for delivery after harvest exceeds
the cost of storage. The price structure varies by location. On
July 28, the price for January delivery of corn is some east central
Illinois locations was $.29 per bushel above the harvest bid.
That premium has been increasing as harvest bids reflect a weakening
basis. If the magnitude of the premium is maintained, or continues
to increase, this strategy will result in a net price well above
the loan rate for farm stored corn and marginally above the loan
rate for commercially stored corn. On the same date, the price
for January delivery of soybeans was only $.18 above the harvest
price, making this strategy much less attractive for soybeans.
Even for corn, the January bid reflected a weak basis. Hedging
or using hedged-to-arrive contracts might be considered as a way
to capture basis improvement.
A second strategy to consider is
to store a portion of the crop under loan and lock in the repayment
rate (after loan funds have been dispersed) for a period up to
60 days. Again, this strategy works well if the PCP tracks the
cash price and cash prices remain extremely low into harvest.
The loan repayment lock-in allows producers to benefit from a
post harvest price rally by selling the crop at a higher price
and repaying the loan at a much lower rate. This strategy is preferable
to the first strategy if the expected price gain within 60 days
exceeds the current premium for later delivery. The most likely
time for a price increase is in December. The application for
the loan needs to be made early due to lags in dispersement. If
prices remain low into mid- October, the repayment rate could
be established at that time. If prices do not rally in the 60
day period, the loan can be repaid at the daily rate at any time
prior to loan maturity.
A third strategy is to establish
the LDP at harvest and to store a portion of the crop unpriced.
This strategy is more risky since a price decline after establishing
the LDP would result in a price below the loan rate. The lower
prices are at harvest, the less risk associated with this strategy.
It is attractive if the expected price increase exceeds the cost
of storage and exceeds the current premiums for later delivery.
For those facing payment limitation,
the use of the certificate program could be considered. Under
this program, crops are harvested, stored, and placed under loan.
Once the loan funds are dispersed, certificates can be acquired
to offset the loan. The value of the certificates is based on
the loan repayment rate at the time. This transaction is equivalent
to taking the LDP, except that time lags are involved. The gains
under this program are not subject to the payment limitation.
A fifth strategy is to harvest the
crop and store unpriced without establishing the LDP. This is
a longer term strategy that established the loan rate as a price
floor, since the crop can be placed under loan or LDP's established
any time prior to May 31, 2001, and allows producers to speculate
on a price increase above the loan rate.
Finally, if storage space is limited,
producers may establish the LDP at harvest and price the crop
for immediate delivery. This results in a price near the loan
rate, if the PCP is tracking the cash price. Based on current
basis and spread relationships in central Illinois, this strategy
is more favorable for soybeans than corn. Current spreads suggest
using storage for corn. Reownership of soybeans with futures or
options could be considered if prices are extremely low.
Issued by Darrel
University of Illinois