Storing Unpriced Grain: Strategies & Tools

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1 Storing Unpriced Grain: Strategies & Tools December 2013 Steven D. Johnson Farm & Ag Business Management Specialist (515) Crop Marketing Strategies & Tools Curriculum: Online Market Simulation: Source: Iowa Commodity Challenge, November

2 Crop Marketing Tools Spot Cash Sales or Forward Cash/HTA Contracts Generate Cash Flow, Avoid Storage Costs Futures Hedges No delivery of bushels, potential margin calls Protects against lower futures prices Options Use both Puts and Calls Create Minimum Price Contracts Buy Puts for unsold bushels Buy Calls to replace sold bushels. Source: Iowa Commodity Challenge, November 2013 U.S. Corn Supply & Demand Area Planted (mil. acres) Yield (bu./acre) Production (mil. bu.) 13,092 12,447 12,360 10,780 13,989 Beg. Stocks (mil. bu.) 1,673 1,708 1, Imports (mil. bu.) Total Supply (mil. bu.) 14,774 14,182 13,517 11,932 14,837 Feed & Residual (mil. bu.) 5,125 4,795 4,546 4,333 5,200 Ethanol (mil. bu.) 4,591 5,019 5,011 4,648 4,900 Food, Seed, & Other (mil. bu.) 1,370 1,407 1,428 1,396 1,450 Exports (mil. bu.) 1,980 1,834 1, ,400 Total Use (mil. bu.) 13,066 13,055 12,528 11,108 12,950 Ending Stocks (mil. bu.) 1,708 1, ,887 Season-Average Price ($/bu.) $3.55 $5.18 $6.22 $6.89 $4.50 Source: USDA WASDE, Jan Nov. 8,

3 U.S. Soybean Supply & Demand Area Planted (mil. acres) Yield (bu./acre) Production (mil. bu.) 3,359 3,329 3,094 3,034 3,258 Beg. Stocks (mil. bu.) Imports (mil. bu.) Total Supply (mil. bu.) 3,512 3,495 3,325 3,239 3,413 Crush (mil. bu.) 1,752 1,648 1,703 1,689 1,685 Seed & Residual (mil. bu.) Exports (mil. bu.) 1,499 1,501 1,365 1,315 1,450 Total Use (mil. bu.) 3,361 3,280 3,155 3,098 3,243 Ending Stocks (mil. bu.) Season-Average Price ($/bu.) $9.59 $11.30 $12.50 $14.40 $12.15 Source: USDA WASDE, Jan Nov. 8, 2013 Iowa 2013 Crop Yields by CRD State Average: Corn 169 bu/a & Soybeans 45 bu/a Source: USDA NASS, Iowa Field Office, Nov. 12,

4 Corn Futures Carry November 26, 2013 July $4.40 May $4.33 Dec. $4.19 Mar. $4.25 Adequate Carry for On- Farm Storage, Limited for Commercial Storage Corn Storage Costs Assumption: Corn is Valued at $4.20/bu - 4.5% APR 4

5 Soybean Futures Inverse Jan. $13.29 November 26, 2013 Mar. $13.12 No Carry, Inverse: Little Incentive to Store On-Farm or Commercially May $12.93 July $12.85 Soybean Storage Costs Assumption: Soybeans are Valued at $12.50/bu - 4.5% APR 5

6 Basis Movements Cash Price minus Futures Price = Basis Calculating Basis The difference between the cash price and futures price. Many factors influence basis: local supply/demand, transportation, costs, etc. The calculation for basis is: (11/26/13) Cash Price Futures Price = Basis $4.10 $4.19 (Dec.) = - 10 $12.90 $13.29 (Jan.) =

7 Futures Price Futures Price Crop Marketing Matrix 1. Store and wait 2. Delayed price contract 3. Minimum price contract 1. Basis contract Corn 2. Sell cash bushels and buy futures or call option 3. Minimum price contract Basis 1. Hedge 2. Non-roll hedge to arrive 3. Buy put option Basis 1. Cash sale now 2. Forward contract Soybeans Source: Iowa Commodity Challenge, November 2013 Corn Hedging Example (market lower) DATE CASH FUTURES BASIS November Goal: $4.10 Cash Corn Sell 1 March $4.25 Estimated: - 15 Late February $3.85 Cash Corn Buy 1 March $4.00 Actual: - 15 Results

8 Corn Hedging Example(market higher) DATE CASH FUTURES BASIS November Goal: $4.10 Cash Corn Sell 1 March $4.25 Estimated: - 15 Late February $4.35 Cash Corn Buy 1 March $4.50 Actual: - 15 Results Estimating a Soybean Floor Price Soybean Cash Sale Price $12.90 less Premium Paid (to buy March $13.10 call) - 42 premium = Est. Floor Price* = *Option examples do not include commissions and interest 8

9 Sell Cash & Buy a March Call Option Futures Cash $13.10 Call equals Market Sale Option less Cash Outcome Price Worth Premium Estimate $ $ $ $ $ $ $ $12.98 Futures Today's futures $ $ $ $ $ Futures Contract Advantages Disadvantages Call Option (& selling cash crop) Put Option (@ storing cash crop) Forward Cash Contract Comparing Grain Contracts Locks in futures prices Leaves basis, storage and delivery decisions open Protects against missing a rising market Limits risk of margin calls Limits risk of losses Protects again falling prices for growing and/or stored grain Limits risk of losses No margin deposit required Lock in price and delivery terms Pay money in advance (margin) Locked in price (can t go higher) Pay money in advance (premium) Lose premium if market moves lower Pay money in advance (premium) Lose premium if market moves higher (cash bushel gain value) Penalties if cannot deliver the contracted amount Locked in price (can t go higher) Often receive a wider basis 9

10 Play the Iowa Commodity Challenge Participants are invited to play the Iowa Commodity Challenge; an online market simulation game. Join the Iowa Farm Bureau member simulation in progress Iowa Commodity Challenge corn and soybean marketing simulation practice with cash, futures, options & forward contracts market 75,000 bu. of corn and 25,000 bu. of soybeans the simulation will end in early March, Go to Source: Iowa Commodity Challenge, November