John's Livestock Comments 09/12/18 12:52:48 PM
September 12, 2018
The more I think about re-owning FALL (out of the field) Soybeans with straight futures vs. Commercial Storage, the more I like it. This was the 1st year EVER, I, yes, I, Mr. Anti-Storage himself, was thinking about allowing customers to use commercial storage. However, i've changed my tune.
1.) You cant use your $. This speaks for itself. Most need cash-flow into year end.
2.) Trump Aid Package. You get $1.65/bushel on 50% of your production, and the "rate" for the remaining 50% is "unknown". For this example, we are going to use "THE KNOWN" and use .83c bonus on 100% production ($1.65 x 50%).
a.) Use the 83c/bushel Aid as your "basis and carry loss" for selling beans in October.
b.) Currently, the "CARRY" from October to April (off-the-farm) is 62c.
c.) So you are 21c ahead already. (83c AID - 62c Carry)
d.) There is interest cost to carry grain and shrink, however, you are getting PAID in Oct. 2c/month x 6 months = 12c.
e.) 21c ahead + 12c (paid up front) = 33c ahead
Those are the REASONS. Now lets look at the SOLUTION and RISK.
1.) Buy Nov '19 futures. This replaces your October CASH SALE.
a.) Why November?
2.) Next chance to threaten World/China Supply is Brazil crop (Starts Harvest in Jan, ends in May)
3.) Next chance to threaten US Supply is March 31 USDA Acreage Report. (unlikely to go up before then)
2.) What does it "cost"?
a.) Broker commission (1 1/2c round-turn)
3.) What is the "margin requirement"? (the good faith money to hold position)
a.) $2400. Its Cash you need to keep in your account.
4.) What if the market goes Lower?
a.) Yes, you need to fund the margin.
b.) If your beans were in COMMERCIAL Storage, your VALUE on those beans would be dropping also.
c.) You are already paid for the CASH. 5000 bushel CASH SALE x $7.50/bu = $37,500 CASH FLOW
d.) $4500 (start-up) BUYS you 1 futures contract (5,000 bushel) and gives you $2100 "extra $" ($4500 start-up - $2400 margin requirement)
e.) If you buy Nov '19 @ 8.95, they would have to go below $8.53 before you had a margin call. ($2100 extra $/5000 bushel=42c)
f.) ****If market goes lower, its HIGHLY likely you will RECEIVE THE REMAINING 82c IN TRUMP AID PACKAGE/BUSHEL!***
g.) ***If market goes lower, WE WILL LOSE TOO MANY 2019 ACRES!
5.) What if market goes higher?
a.) You own your beans with a futures contract. You make $.
b.) You already made up the basis loss with the AID package. (83c... possibly more to come)
Call me with questions