Farmer Marketing Questions | Farm progress

Roger, I have about a third of my soybeans priceless. Am I better off selling at that lower price and buying them back using call options, or paying the 5 cents per month storage at the elevator? Grain silo storage is not an option. Thanks

Of these two choices, I would pay storage until mid-December to capture the base crop appreciation to December, then move to a July call option. Make sure your merchandiser will let you out of storage, sell beans, and buy a call option before you do anything.

Let’s look at the math of stocking versus selling now and buying a call.

Opportunity cost

If cash beans delivered now are worth $13.50 and you are paying 5% interest on an operating loan, 5% times $13.50 = 67½ cents interest per bushel per year, or 5.6 cents per month. Add the 5 cents per month commercial storage charge and your opportunity cost of owning these grains is 10.6 cents per bushel per month, which equals 26½ cents until the third week of December.

It is a fixed cost. You will have to pay this cost whether the price of the bean goes up or down.

By the third week of December, the spot bean price will have gained 10 cents of carry (the January futures price is 10 cents above the November futures price) plus a base appreciation of 30 to 50 cents; say 40 cents. So the net cash bean price to you on December 23 will be 23½ cents more (50 cents carry and base gain minus 26½ cents cost of ownership) plus or minus the change in the futures price.

If you sell the beans now for $13.50 and take 55 cents of that money to buy a January call at $13.80 at par, you will maintain a long position in the bean futures market with limited risk of loss. at 55 cents.

If January beans are at $13.80 on expiry day (December 23):

  • The base and carry would earn 23½ cents with no forward gain if stored.
  • The call option would expire worthless, losing 55 cents.

If January Beans are at $14.00 on Expiry Day:

  • Base and carry would earn 23½ cents plus 20 cents forward gain = 43½ cents net if stocked.
  • The call option would be worth 20 cents, losing 35 cents.

If January beans are $15 on expiry day:

  • Base and carry would gain 23½ cents plus a forward gain of $1.20 = a gain of $1.43½ if stocked.
  • The call option would have a value of $1.20, a net profit of 65 cents (sell at $1.20 minus cost of 55 cents).

If January Beans are at $16.00 on Expiry Day:

  • Base and carry would gain 23½ cents plus a forward gain of $2.20 = a gain of $2.43½ if stocked.
  • The call option will be worth $2.20, or a net profit of $1.65.

If January Beans are at $13.00 on Expiry Day:

  • The base and carry would earn 23½ cents minus a forward loss of 80 cents = 56½ cents loss if stocked.
  • The call option will be worth nothing, losing 55 cents.

If January Beans are at $12.00 on Expiry Day:

  • The basis and carry would gain 23½ cents minus a forward loss of $1.80 = $1.56½ loss.
  • The call option will be worth nothing, losing 55 cents.

Consider short-term storage

You didn’t ask, but I suggest you consider storing for two months and then going into a basic contract in July or selling the beans spot in December and buying futures. Either will earn you 10 cents more each month than stockpiling and the market risk would be the same.

Easy money is the basic appreciation from harvest to post-harvest plus the 10 cents carried over to January. Currently, there is a carryover of 20 cents from January to July, but the basis would need to be firm 31 cents to break even on the cost of ownership.

Of course, if bean futures rise $3 by May or June, you’d think storage would pay off. No.

You would have $13.50 tied up waiting to earn $3 and paying 10.6 cents a month to start. You can sell the beans for cash when storage no longer pays and use $1 as margin to buy beans in July futures.

If you do a basic contract in December, you’ll probably get 70% of the cash value and lock in $4 to earn another $3.

Which is better: turn $13.50 into $17.50 and pay 10.6 cents a month to do it or:

  • Turn $4 into $7 and pay interest of 2.4 cents per month or
  • Turn $1.00 into $4 and pay interest on $1 (half a cent a month)?

Marketing decisions must include money management.

Wright is an Ohio-based grain marketing consultant. Contact him at (937) 605-1061 or [email protected] For more information, visit www.wrightonthemarket.com.

No one associated with Wright on the Market is a cash grain broker or a futures broker. All information presented is researched and believed to be true and correct, but nothing is 100% in this business. The opinions of the author are not necessarily those of Farm Futures or Farm Progress

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