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Consider this

Agriculture.com Staff 03/05/2010 @ 12:16pm

I missed Commodity Classic this year for only the second time since 1980. Back then it was called Soybean Expo and was the occasion for my first trip to New Orleans. ASA and National Corn growers merged efforts in 1996. Since then the wheat growers and sorghum farmers have joined in to make it a huge conference. Since 1996, I have had a breakout session on the program every third year. This would have been my year, but I did not get invited. That made the decision to stay home this week a lot easier.

With all of the weather stress this winter and a busy schedule of meetings, it seemed logical to stay closer to home. The thought of flying to Los Angeles, then driving an hour to the convention center seemed like a lot of work for a three day meeting. I can just about guarantee that we will be attending again next year unless we are snowed in. Meanwhile I am enjoying the reports from Los Angeles on Ag Online.

I noticed something else unusual in the local grain markets this year. As of Monday, my local elevator is offering deferred price contracts on grain currently being delivered. With DP contracts the grain is delivered and ownership is passed to the elevator. However, the farmer does not have to set the price until later. In this case October 1 is the deadline.

I have not normally been a fan of DP contracts. With ownership of the grain going to the buyer, the farmer becomes an uninsured creditor in the event the elevator goes broke. The producer could end up losing most of the value of the crop. A second factor is that the farmer has no leverage once the buyer owns the grain. There is no incentive to pay up is the user already has the supply.

I will consider taking advantage of the DP offer this year. It will allow me to get the corn physically moved before field work starts. It will allow me to maintain exposure to potential price rallies even thought my corn is not dry enough to store into the summer.

A couple of factors might still influence the decision. The first is that the elevator might get so much grain that they discontinue the offer before I get the corn delivered. Another factor is that the price might rally before I finish delivering so that I would just sell it across the scale.

A big trap with a DP contract is that is puts no pressure on the farmer to make a selling decision. Analysis for the "Winning the Game" workshops shows that holding old crop grain past August 1 has a very high probability of resulting in a very low return when both price and interest on stored grain is taken into account.

If your elevator is offering DP contracts, consider them as you would any other tool. However, be aware that you could end up with less than selling on delivery. It is a useful tool if it helps you get out of condition grain moved in a timely manner. If it only delays a decision until current prices are history, it is not worth the risk.

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