NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
September 9, 1999
George Flaskerud, Extension Crops Economist
NDSU Extension Service
Deteriorating soybean crop conditions have led to a recovery in soybean prices to mid-August levels. This late-season rally may present some preharvest selling opportunities.
One marketing strategy to consider is to bring cash forward contract sales up to the two-thirds level by $5.30 using the November futures contract as a guide. The market is likely to run into resistance at the previous highs of $5.22 and $5.28, set on April 22 and March 31, respectively. The November contract closed at $4.95 on Sept. 2.
The market will likely retreat into harvest offering a favorable loan deficiency payment (LDP). Capture the LDP as the soybeans are delivered on the cash forward contract, making sure you comply with LDP regulations at the Farm Service Agency (FSA). The risk of this strategy is that the price will increase and the LDP will decrease after the soybeans are cash forward contracted.
An alternative strategy is to simply sell two-thirds off the combine in the cash market, being sure to take the LDP at the same time. This strategy eliminates the risk of a decreasing LDP after locking in the price.
A third alternative is to take the LDP at harvest, especially if it is large, and store the soybeans. The risk here is if the price goes down after harvest or increases very little. Your local soybean price would need to increase by about 34 cents by April just to break even on net storage costs. In calculating the breakeven, credit was given for interest earned on the LDP payment at a rate equal to the bank loan rate. In effect, the LDP payment was used to reduce bank debt, charged at 10 percent annually.
A fourth alternative is to not take the LDP at harvest but to store the soybeans under Commodity Credit Corporation (CCC) loan. This analysis is based on the following assumptions: CCC loan proceeds are used to offset bank loans, the posted county price (PCP) changes inversely by the same amount as the local cash price, and storage costs are limited to an in-and-out-of-the-bin charge of 15 cents with a storage shrink of less than 2 cents. The difference in net returns between this strategy and strategy No. 2 would be storage costs of about 16 cents. This difference could be overcome by a 16-cent bump in the local cash price leading you to lock in the PCP and sell on the same day as the bump. The bump would have to exceed 16 cents to make this strategy worthwhile. The risk of this strategy would be the storage costs of 15 to 17 cents.
A fifth alternative would be a variation of strategy No. 4 but involves more diligent market attention. In this strategy, you would lock in the PCP at prices near the lower end of an expected price range and sell in the cash market at the upper end of the expected price range. FSA gives you 15 or 30 days to complete delivery on a locked in PCP. You get the locked in PCP only on delivered bushels. After the specified period has expired, the PCP can be locked in again at the current level. See your local FSA for further details. The risk of this strategy would be the same as for strategy No. 4.
Estimating the expected price range under strategy No. 5 would be the tough part. An example demonstrates that the price increase received may not be that rewarding. In this example, only prices for Thursdays or days closest to Thursdays were examined. The greatest price increase at Hunter, N.D., during nine intervals of roughly 30 days each (beginning Oct. 29 and ending July 8) was 27 cents. Other price increases during the remaining intervals were 27 cents, 10 cents, 17 cents, 4 cents and 3 cents.
A basis similar to last year's weak basis at Hunter was used in my analysis. The nearby basis was a minus 72 cents in October, on average. It got worse in November before returning to the October level in December. Thereafter, the basis improved very little. The June average was a minus 65 cents.
Local cash price expectations in my analysis were futures prices on Sept. 2 adjusted for the basis. Future prices and basis could be stronger than expected if crop conditions further deteriorate, demand is stronger than expected, and/or South America significantly reduces planted acres.
The LDP for soybeans varied substantially during the past year, according to records at the North Dakota State FSA office. A review of the LDP for Thursdays indicates that the soybean LDP for Cass County climbed to 54 cents on Oct. 1, at which time the soybean cash price at Hunter fell to $4.44. By Nov. 12, the LDP had dropped to zero while the cash price had climbed to $5.06. The LDP proceeded to increase irregularly to a seasonal high of $1.45 on July 8 while the cash price at Hunter fell to a seasonal low of $3.49.
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Source: George Flaskerud (701) 231-7377
Editor: Dean Hulse (701) 231-6136