How rising interest rates may impact marketing decisions
What is six months in duration and costs 54¢ per bushel? The answer is storing $13.50 soybeans when interest is at 8%.
When considering a long-term return on investment, it is important to consider the opportunity cost of paying down principal. In our example, you will need 56¢ just to cover interest cost, not including storage and handling expenses. Oh, and there are a couple other things, like price and basis risk.
Rising interest rates are now a major consideration facing farmers who will decide to store or sell. It has been close to a couple of decades since interest rates had the impact they do today. Changes to marketing may be at hand.
Storage, traditionally a good alternative to spot pricing at harvest, will be more measured. Confidence in a price rally or basis improvement post-harvest will be needed to encourage storage. For the long run, it is more of a gamble to store when it costs more. With the interest rate risk as a factor this year, we will likely see more aggressive forward contracting and hedging with the intent for harvest delivery.
Also more likely is the use of buy-back strategies after harvest, using the leverage of futures or options. If purchasing futures, you are at the risk of the market. However, the initial margin requirement is roughly 3% to 5% of the value of the contract. Owning futures may make sense. You are subject to market risk and opportunity cost of margin dollars. Buying calls or bull call spreads for a post-harvest recovery is done with a fixed-risk component to the equation. It will be important to compare the cost of storage to the cost of a fixed-risk re-ownership position.
Another marketing angle will be the use of put options, where prices are at a level worth protecting in winter or spring. By using a put, you are putting a price floor against futures. The idea is that if more farmers are likely to sell for harvest delivery, there is a higher chance that pressure on prices will occur into the harvest season. By protecting the price of bushels you do not intend to forward sell, using a put is a strategy every farmer should be aware of and understand.
Now is the time to have a conversation with your advisor and discuss your alternatives. No two years are alike. A year ago, prices were rallying as the war, supply disruptions, and a drought in Brazil all contributed to higher prices. This year could be the opposite. Big crops and downtrending markets, along with faster farmer selling due to higher interest rates, are factors the market will digest. No one plans to fail; however, many fail to plan.
Be sure to understand your risks and rewards before entering into any position.
Editor's Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.