Crop Storage Analysis: Program Overview

Transcription

1 Crop Storage Analysis: Program Overview The Crop Storage Analysis program aids farmers in making crop storage decisions. The program compares selling grain at harvest to selling grain one to twelve months after harvest. It does this by calculating the breakeven cash price for each month. Each breakeven price is the estimated cash price that must be received to cover storage costs. Breakeven cash prices then are compared to projected prices to gauge the possibility of exceeding the breakeven price. The Crop Storage Analysis program contains two sections. The breakeven price module section collects information related to storing grain, while the projected price module section collects futures prices and put premiums used to calculate the probability of breakeven prices in the future. Information needed to run this program can come from: 1. An individual s farm records. 2. Grain elevator s storage costs. 3. Chicago Board of Trade ( To make use of this program, you must be able to provide the costs and requirements of your local elevator, as well as futures contracts information. The program requests the following information: A. Breakeven Prices Harvest date, current crop price, minimum storage charge, ending month of minimum storage, monthly storage charge, annual interest rate, and percent of shrinkage. B. Estimated Projected Prices Basis of the crop, futures prices, and put premiums. Navigating the Crop Storage Analysis program The Crop Storage Analysis program contains two modules (sheets): breakeven price module and projected price module. On each sheet, there are two buttons. One is called Print, while the other is named for the other sheet. By selecting one of these, the other sheet will appear or the current page will print automatically to your printer. There are also tabs at the bottom of the Excel spreadsheet screen that can move you between the two sheets. These are called: Breakeven Module and Projected Price Module. Simply click on the name of the sheet you wish to view.

2 How to use the Input Sections To explain the input required to use this program, an example has been developed for Bill and Sally Farmer. The example is presented such that the input sections are filled in for you. Only enter inputs where the text or numbers are blue. The other numbers shown (in black) are calculated using formulas that include the inputs. These boxes are protected so that formulas cannot be accidentally changed. If you click on a protected box, you will receive the following message: To remove this message from the screen, click on the OK button. Example: Bill and Sally Farmer On October 1, 2001, Bill and Sally Farmer harvest corn and are unsure whether to store or sell it. If they store the grain, how long should they store it for? They d like to know at what cash price it is profitable for them to store their grain in the current month as they are paying a 9% interest rate on their operating loan. The current price of corn is $2.00. The local grain elevator charges a 12-cent per bushel minimum storage fee until the end of the year. After the end of the year, the monthly storage fee is 2-cents per bushel per month. Bill and Sally s harvested corn has 15.5% moisture content; however the elevator shrinks stored grain to 14% moisture content. Breakeven Price Module The Breakeven Price Module Input Section is shown below. Completed items are for the Bill and Sally Farmer example.

3 Description of Inputs The starting date of the analysis represents the date the crop is put in storage. Bill and Sally entered 10/1/2001 to represent the day they harvested corn and put it in storage. The current price represents the current cash price offered on the starting date. Bill and Sally entered $2.00 for the current price of corn. The minimum storage charge refers to the dollar amount per bushel charged for minimum storage. An entry of $0.12 means that a 12-cent per bushel storage charge is incurred no matter how long grain is stored. Bill and Sally entered $0.12 because the elevator charges a 12-cent per bushel minimum storage fee until the end of the year. The ending month of minimum storage is the ending month for which the minimum storage costs cover all storage costs. The month is entered numerically such that an entry of 11 represents November. If monthly storage costs are incurred immediately and there is no minimum storage costs, an entry of zero is appropriate. Bill and Sally entered a 12 to represent December because the elevator charges a minimum storage fee until the end of the year. After December, a monthly storage cost is incurred. The monthly storage charge refers to the dollar amount per bushel charged for monthly commercial storage after the minimum storage date. An entry of $.04 means that storage costs are 4-cents per bushel per month. Bill and Sally entered $0.02 to represent the elevator s monthly storage fee of 2-cents per bushel per month. The annual interest rate is the percentage used to calculate interest costs on stored grain. In this analysis, the interest rate represents the opportunity cost for money. For example, for operations with debt, the interest rate represents the short-term cost of debt. For farms with no debt, the interest rate can be represented by an off-farm investment, such as the interest rate on a CD. Bill and Sally entered 9% to represent cost of debt from their operating loan. The shrinkage in storage refers to the percentage in volume that grain will shrink in storage. Some elevators will have a designated (volume) shrink factor per point of moisture. If the elevator does not designate a shrink factor, you may use the following equation to calculate the volume shrink factor. Moisture for Sale (%) - Moisture for Storage (%) Volume Shrink Factor (%) = Moisture for Storage (%) For example, if grain can be sold at 15.5 percent, but grain will be shrunk to 14 percent moisture in storage, the volume shrink factor is 1.74 percent % =

4 Reports for Breakeven Price Module: The Breakeven Price Module generates a report that displays breakeven cash prices for twelve months from the start date of the analysis. Each month is listed along with seven interest rates. The interest rates represent the opportunity cost for money. Below is the report generated for the example. Breakeven prices are based on the current cash price. Breakeven prices include charges for storage costs, interest costs on grain from the time it is put into storage, and grain shrinkage. The calculation for the breakeven prices is shown below. Calculation of Break-Even Price: (Rounded to 2 decimals) The formula for calculating the breakeven price is: B/E (per bu.) = Current price + Minimum storage charge + Monthly storage charge + Shrink + interest cost Where: Minimum Storage Charge* Monthly Storage Charge = (monthly storage charge*) x (# months in storage after minimum storage period) Shrink = (Current Price*) x (Shrinkage %*) Interest cost = (# days in storage / ) x (interest rate**) x (current price *) *required input for this program ** seen in Break-Even table Example: From the Breakeven table above, an 8% interest rate on 04/30/02 = breakeven price of $2.33 Minimum Storage Charge $0.12 Monthly Storage Charge $0.02 * 4 = $0.08 Shrink $2.00 *.0174= $0.03 Interest Cost (212/365.25) *.08 * $2.00 =$0.10 Break-Even Price = $2.33

5 Understanding the Breakeven Price Report: If the cash price on a given day is projected to be above the breakeven price that is recorded on the Breakeven Price report for that month, then storing grain will be profitable. The above example is based on a $2.00 cash price on October 1, The breakeven price for October 31 is $2.17 given a 9% interest rate. If, on October 31, 2001, grain is selling for $2.18, it was profitable to store the grain until October 31 st than it was to sell it at harvest. In the program, the Calculation Section is located to the right of the Breakeven Price Module Report. In this section, Storage and Shrink charges are calculated and reported according to the input entered in the main menu. This section provides the user with the per bushel storage and shrink charges. Interpretation: The storage and shrink costs for each month are separately listed in this table. For example, for October 31, 2001 at 9% interest, the breakeven price needed to store grain is $2.17. This price represents the sum of storage expenses ($0.12), shrink costs ($0.03), and the opportunity cost (interest) of storing grain ($2.02). Example Interpretation From the Breakeven Price Report, Bill and Sally Farmer know that in order to make a profit by storing their grain until January 1, 2002, they need to receive at least $ 2.21 per bushel. (Report shows a breakeven price of $2.20 on 12/31/01 at 9% interest rate.)

6 Example: Bill and Sally Farmer (continued) Bill and Sally believe the cash price for corn in December 2001 will be $1.90 per bushel. Th ey found the following Futures Options and Put Premiums on the Chicago Board of Trade website. Contract Month Futures Price (per bu.) Put Premium December 2001 $2.10 $0.06 per bu. for $2.10 strike price March 2002 $2.22 $0.08 per bu. for $2.20 strike price May 2002 $2.30 $0.11 per bu. for $2.30 strike price July 2002 $2.35 $0.12 per bu. for $2.30 strike price September 2002 $2.39 $0.13 per bu. for $2.30 strike price Bill and Sally have the following questions: 1. What is the basis of their corn crop? 2. What are the chances that the cash price will fall between $2.10 and $2.30 in May 2002? 3. At what month and breakeven price is expected profit POSITIVE? 4. What is the probability that the cash price will rise above $2.10? Projected Price Module The Projected Price Module calculates expected prices for comparison with the breakeven prices generated in the Breakeven Prices Module already described. This portion of the model makes use of futures prices to obtain estimates of cash prices in future months. The expected price equals the futures price for the relevant month minus the basis. Probability information is generated using options prices and a Black-Scholes option-pricing model. Below is the input screen for the projected price module.

7 Descriptions of Inputs Crop refers to the grain that is to be stored for purposes of this analysis (choices are: corn or soybeans). Bill and Sally entered corn for this analysis. Basis refers to the estimated basis, or value difference between a futures contract price and an expected cash price. For example, you may expect the cash price on December 1 st to be $2.00 per bushel, while today a December Futures contract is priced at $2.10 per bushel. The basis is calculated by subtracting the expected cash price from the futures price, or $ $2.00 = $0.10. Bill and Sally entered $0.20 because they believe that on December 1 st, the cash price will be $1.90 per bushel and today, a December Futures contract is priced at $2.10 per bushel. $ $1.90 = $0.20. The futures prices are entered on the left side of the input screen corresponding with the month of the contract. For these months, futures contract prices from the Chicago Board of Trade should be entered. These serve as estimates for the price for the month of the contract. Be sure to enter current prices! Do not use the default prices as these only correspond to the example provided. Bill and Sally entered the futures prices as given in the example. The put premiums are located on the right side of the input screen. For each contract month, enter the put premium as reported from the Chicago Board of Trade. The strike prices are calculated and listed based on previous entries. The calculation rounds the futures price to the lowest tenth. These premiums are used to estimate variability of prices. Be sure to enter current put premiums! Do not use the default put premiums as these only correspond to the example provided. Bill and Sally entered the put premiums as given in the example. Reports for Projected Price Module The projected price module generates two reports: 1. Projected vs. Breakeven Prices Expected price, breakeven price, expected profit, and percent time price will be below breakeven price. 2. Possible Prices and Profits by Month Percent time cash price is? Percent time price will be between? Percent time price and profit will fall below? The reports are shown on the following pages.

8 Report 1: Projected vs. Breakeven Prices The table below reports the expected price, breakeven price, expected profit, and the percentage of time the cash price will fall below the breakeven price. This information provides a user with an estimate of the profitability of storage along with an estimate of risk. For example, if the expected price is greater than the breakeven price, the expected profit is positive. This suggests that there is potential for you to earn a profit. Also, risk is measured by the percentage of time that cash prices fall below the breakeven prices. The higher the probability, the riskier it is. Understanding the Projected vs. Breakeven Prices Report: In the above example, the model estimates the expected price in December 2001 to be $1.90, while the breakeven price is $2.28. This calculates a $-0.38 expected profit for December There is a 99% chance that the cash price will fall below $2.28 in December However, in September 2002, the expected price is $2.59 with a break-even price of $2.19. While there is still a negative profit, there is only an 82% chance that the price will fall below $2.59.

9 Report 2: Possible Prices and Profits by Month The chart below is a representation of a monthly report displaying the probability of prices and profits. To view a specific month, click on the name of the month on the screen (ie. Mar-02) and a list of possible months will appear. Move the pointer over the month you d like to view. The box in the lower-left hand corner allows the user to estimate the probability of prices ranging between two set prices in the month chosen. The user enters the two prices next to Price 1 and Price 2. The probability, or percent, will change accordingly. The box in the lower-right hand corner provides the percentage of time the cash price and profit will fall below the given price. This automatically changes when changes are made to inputs. Interpretation of Possible Prices and Profits by Month Report The above chart is for March It reports that there is a 17% chance that prices will fall between $1.90 and $2.00 in this month. The box on the lower left suggests that there is an 65% chance the price will be between $0.01 and $2.10. The box located in the lower right side suggests that 75 percent of the time, the cash price will be below $2.17 and profits will fall below $ Example Interpretation From the reports shown in this section, Bill and Sally Farmer have found answers to their questions. The basis of their corn is $0.20. There is a 24% chance that the cash price will fall between $2.10 and $2.30 in May Expected profit is not positive in this analysis. There is a 65% chance that prices will fall between $0.01 and $2.10.