Marketing 2006 soybeans: LDP or marketing loan?
The cash soybean prices have been on a wild ride since the U.S. Department of Agriculture Crop Production Report was released on September 12.
It appeared with increasing crop size, we'd see lower futures prices and wide harvest basis at harvest. As a result, there would be a loan deficiency payments (LDP) for soybeans that could exceed could exceed 20 cents per bushel. However, mid-September rainfall slowed soybean harvest across much of the Corn Belt resulting in higher futures prices and lower early harvest LDPs.
Timing Fall Soybean LDPs
The largest soybean LDP in Iowa during the 2005 harvest was only $0.05 per bushel and occurred October 12 and again on October 24. There was never another chance to LDP soybeans this past marketing year. For those that used the marketing loan for their 2005 soybean crop, there has been a marketing loan gain available since mid-August.
During harvest, in five out of the last eight years, there were LDPs available. In four of those eight years, the LDP remained into the late winter or spring months, which mean the cash price reflecting the posted county price (PCP) remained below the county loan rate. With large U.S. ending stocks projected at 449 million bushel as of September 1 and the potential for large U.S. production this fall, this same LDP risk is possible into 2007.
2006 Soybean LDP Outlook
Predicting when the largest soybean LDP will occur is much more difficult than that of corn, which generally occurs at harvest. With the large U.S. soybean stocks consuming commercial storage space this fall, the basis should be wider than normal. With the normal fall harvest pressuring the nearby November soybean futures contract, soybean LDPs could last through most of harvest. To a large extent, the size of the LDP depends on the size of the crop reflected in the October 12 USDA reports and response of the futures price.
Develop your own cash flow strategies and consider both your on-farm and commercially stored bushels. If you take the LDP on all or a portion of your soybeans, can you manage the risk of lower prices and a threat of an even larger LDP that could occur later in the marketing year?
The "carry" or "spread" between November 2006 and July 2007 futures contracts has now declined to around 25 cents per bushel. This "spread" was nearly 40 cents just a few weeks ago, which is abnormally large and nearly rewards the full cost of commercial storage. Where on-farm storage space is available, the grain market may signal a reward for storing soybeans. However, considering the cost of storing soybeans commercially around four cents per bushel per month plus interest, any basis improvement during the post-harvest period might not cover commercial storage. On-farm storage with lower costs of grain ownership makes more sense for storage strategies beyond the winter months.
Expect Post-Harvest Opportunities
With soybeans stored commercially, a consideration is to sell some soybeans after harvest anticipating a better basis and potentially higher prices that result from the uncertainty of South American soybean production. This usually occurs in the months of November and December.