Look for opportunities

Soybean support programs available With soybean prices currently below the national loan rate and limited upside potential from weather rallies due to sizable stocks, farmers need to be aware of the support programs that are available to them.

"That is, growers should review the details, eligibility requirements and payment limitations for the support currently available for soybeans in the form of loans, LDP's and commodity certificate programs," says Nicholas Piggott, agricultural economist with North Carolina State University.

This is especially the case for producers who anticipate coming up against the $75,000 payment limitation on LDP's who need to become familiar with the certificate program, he adds.

In considering and comparing alternative strategies in the current environment of depressed prices, the first task is to determine how much on-farm and off-farm storage is available and what it costs, says Piggott.

"Given that harvest time typically brings about the weakest basis and lowest cash price, if storage is a possibility, then it's worth calculating what the market is offering as expected returns to storage, to possibly avoid delivering and pricing soybeans during harvest time.

"I would emphasize that storage capacity provides more flexibility, but it may not always be the best choice as a marketing strategy," he says.

A rough calculation of the returns to storage can be done by taking a forward contract price for delivery sometime into the future, or you can use the current price of a futures contract, and subtract the typical basis at that time, says Piggott.

"From either of these prices, you then can subtract the current harvest price and the storage costs, which yields an estimate of the returns to storage.

Example given "For example, if the current cash price for soybeans in Elizabeth City, N.C., is about $4.70, the March 2001 soybean contract is trading at about $5.15 and the basis in March at Elizabeth City historically has been 0.07 under, this implies a cash price of about $5.08 in March - a gain of 38 cents compared to a cash sale at harvest. Thus, the return to storage of soybeans is 38 cents minus storage costs."

The cost of storage, says the economist, will vary considerably depending on whether the soybeans are stored on or off the farm. On-farm storage costs consists of interest and electricity, with electricity costing about four to five cents per month.

Off-farm storage costs include the elevator charges (in and out fees of nine cents and eight cents, respectively) and interest amounting to about seven to eight cents per month for a storage period of five months.

Based on these estimates, storing soybeans on-farm for about five months through March would net 13 cents per bushel while off-farm essentially is a break-even prospect, notes Piggott.

"A producer may want to consider on-farm storage of soybeans if it is available. If space is tight, it may be more profitable to store corn and wheat instead of soybeans due to the lower per-bushel interest costs for corn compared to soybeans."

On-farm possibilities To do better than the loan rate and utilize on-farm storage, a relatively conservative strategy might be to store the soybeans, price them immediately either by using a forward contract or hedging with futures and taking the LDP at the same time (or initiating the 60-day lock-in), says Piggott.

"By following this strategy, and using the expected returns from a storage hedge through March, we would net about $5.08 on the hedge (assuming no basis risk) and the LDP at harvest would be in the range of $5.33 minus $4.70 which would equal 63 cents, less the on-farm storage cost of 25 cents, netting about $5.46.

"A more aggressive strategy would be to store the soybeans, take the LDP at harvest and leave the soybeans unpriced, convinced that prices will rally into the fall. Some combination of these two strategies also is possible by dividing the total amount stored into parcels or lots with the proportions of each determined by a grower's tolerance for risk."

It is worthy to note, he adds, that the merits of storage are stunted when cash prices are below the loan rate, since there is no upside potential for price until the market goes above the loan rate - below-the-loan-rate increases are offset by a shrinking LDP.

"The key is to capture a large LDP at the seasonal low or make use of the 60-day lock-in on the Posted County Price (PCP), which basically is a limited opportunity to capture some upside potential in a market that is below the loan rate.

"Ideally, a grower would like to collect the LDP or initiate the lock-in at about the seasonal low - most likely to be at about harvest time - and to price the stored grain for delivery in a post-harvest rally and a strengthened basis."

A final strategy for on-farm storage, says Piggott, is to use a put option on a deferred futures contract to accomplish the storage hedge rather than using the futures explicitly. This will preserve some upside potential from favorable price movements, he says.

"This strategy is appropriate if you are fairly confident that the market will rally, but you want to maintain some insurance in case it does not. Of course, the downside to this strategy is that this insurance is not free."

Other pricing options For soybeans with no on-farm storage possibilities, there is less flexibility to do better than the loan rate, contends Piggott. "To get the loan rate - the most simple and risk-free strategy - simply sell soybeans in the cash market at harvest and collect the LDP. If the local cash price and PCP are very similar, this should net you the loan rate."

More expensive off-farm commercial storage should be considered only if an elevator is offering a forward contract that more than covers the charges and interest, he advises. The difference between the forward contract offer and the charges would represent how much better you would do above the loan rate, he says.

One other scenario that might encourage commercial storage would be a local basis at harvest that is extremely weak. "This might signal an opportunity to commercially store the soybeans under a Hedge to Arrive (HTA) contract and to take the LDP at harvest while the basis is weak, with the intention to lock in the basis as soon as it strengthens."

One other possibility when storage is not an alternative, says Piggott, is to sell the soybeans at harvest and take the LDP and use it to buy a call option. This strategy is appropriate if you are convinced that soybeans will rally in the near future, he adds.

"If the market fails to rally significantly, you run the risk of not making the loan rate with this strategy. Furthermore, this strategy is a speculative long position and the losses incurred are not necessarily deductible for income tax purposes."

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