 
SEPTEMBER 20, 2004
CORN AND SOYBEAN PRICING DECISIONS
Cash corn prices have declined below the
Commodity Credit Corporation (CCC) loan rate in many markets
and cash soybean prices are very near the loan rate. A number
of storage and pricing alternatives are available for producers
to consider now that the loan program has come into play.
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. Some of the alternatives
are examined here, using prices relevant for Central Illinois
as an example. The following discussion does not address all
of the alternatives, but is intended to illustrate the numerous
alternatives available.
In the case of corn, the following prices reflect conditions
as of September 20 - spot cash price of $1.95, CCC loan rate
of $2.03, posted county price of $1.89, and premiums for January
delivery over harvest delivery of $.15. One strategy is to
establish a loan deficiency payment (LDP) of $.14 and sell
corn for $1.95, for a net price $.06 above the loan rate.
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, 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.
A third alternative is to establish the LDP at $.14 and store
the crop unpriced. The net price from this strategy is the
eventual selling price plus $.14 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. 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 LDP at $.14 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
premium for January delivery.
A fifth alternative is store the crop and price it for future
delivery (contract or hedge) and then establish the LDP before
delivery. This strategy might be considered if the LDP 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 LDP.
In the case of soybeans, the following prices reflect conditions
as of September 20 - spot cash price of $5.20, CCC loan rate
of $5.18, posted county price of$5.44, and the premium for
January delivery over harvest delivery of $.15. One strategy
is to sell soybeans for $5.20, $.02 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. 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 LDP and sell the crop, for immediate or future
delivery, and replacing the cash position with futures or
call options. If the crops are sold for future delivery, LDP's
could be established any time before delivery, if available.
Once the crop is delivered, it is no longer eligible for loan
benefits. 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 CCC 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.
Issued by Darrel Good
Extension Economist
University of Illinois
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