Struggling with what to do about larger than expected yields?
With today's basis levels being so low (vs. the 4-year historical avg), many farmers are searching for the best alternative(s) to On-Farm Storage. Two options (each with a cost) are:
- Commercial Storage
- DP (Delayed Price) contract
The main difference between the two is beneficial interest and availability (not all elevators offer Commercial Storage or DP contracts). With Commercial Storage, producers have upside in both futures and basis. Producers also maintain beneficial interest, which might be relevant to government programs, such as LDPs (Loan Deficiency Payments), as one has to maintain beneficial interest to be eligible. https://www.fsa.usda.gov/programs-and-services/price-support/loan-deficiency/index
DP (Delayed Price) contracts enable a producer to have upside potential in both basis and futures price movement; however, beneficial interest is transferred to the elevator once the grain is delivered and the producer agrees to enter into a DP contract. This enables the elevator to sell the grain into the current market to create space for other grain that needs to move during harvest. Once the sale is made, the elevator is subject to price risk, so typically elevators will charge a service fee to help mitigate that risk. Some elevators have a one-time dump charge and may charge an additional monthly fee until the grain is priced to offset their risk of having to sell the grain into a weak market.
Capturing the Carry:
"Carries" exist in the market, when deferred futures are worth more than nearby futures. This is the market's way of incentivizing or paying those who can store the grain until it is needed. One way to "Capture the Carry" in the market is to sell futures and store the grain. In a "classic" carry market, futures months will roll off (or expire) at a similar price level to the preceding futures month at expiration due to the natural forces of supply and demand.
Many farmers will sell December futures for corn or November for soybeans, store their grain on the farm, and roll their futures position to a deferred futures month to capture the carry, and wait for basis levels to improve. This is one of the benefits to having on farm storage; but remember in order to capture the carry from one futures month to the next, one has to sell futures (either through a broker or in the form of a Hedge-to-arrive cash grain contract). Get more information on Hedge-to-arrive and other helpful programs and email or chat with a Gavilon professional by clicking "here".
New Contract Types:
There are some new products available in the market today, that provide unlimited upside on futures (there is downside risk as well) and cash flow in the form of an advance on delivered grain:
- Gavilon Producers' Choice contract
- Cargill's Focal Point contract
- FBN's Deferred Futures contract
- Other competitors may offer similar, competing products
These contracts, (that have been entered into on delivered grain) act very similar to an Extended Basis contract in that, the producer no longer has upside on basis, but has penny for penny movement relative to a selected futures reference month. The key benefits are that producers are able to move their grain, receive an advance for cash flow, and gain additional time for the futures market to potentially move higher (accepting the risk that the market can move lower). The main reason to enter any one of these contracts is that one has a strong belief that the futures market will move higher, prior to the pricing deadline specified in the contract. These contracts differ from an Extended Basis contract, in that they can also be used to re-price existing HTA (Hedge-to-arrive) contracts on grain that has yet to be delivered. Click "here" to learn more about Gavilon's Producers' Choice contract.
Why then, would someone choose these contracts over an extended basis contract? It might be due to limitations on the number of times one can either roll or re-price a contract and/or any applicable service fees. Why so many choices? It depends on the producer's bias and needs. See my last blog "Soybeans are stuck" for an extensive list of available alternatives.
Finally, competition among buyers is a good thing for any market. I believe competition does two things: 1) improves price levels for the producer (relative to local supply and demand) and 2) drives innovation...innovation in technology, new products, customer service and the overall experience for producers.
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