Marketing question from a client (first week of October 2022):
Roger, I have about one-third of my soybeans unpriced. Am I better off to sell at this lower price and buy them back using call options, or pay the 5 cents a month storage at the elevator? Grain bin storage is not an option. Thank you.
Of those two choices, I would pay storage until mid-December to capture the basis appreciation from harvest to December and then switch to a July call option. Make sure your merchandiser will let you go from storage and to sell beans and buy a call option before you do anything.
Let’s look at the math of storing versus sell now & buy a call.
If cash beans delivered now are worth $13.50 and you are paying 5% interest on an operating loan, 5% times $13.50 = 67½ cents interest per bushel per year, which is 5.6 cents a month. Add the 5 cents a month commercial storage fee and your opportunity cost to own those beans is 10.6 cents per bushel per month, which amounts to 26½ cents until the third week of December.
That is a fixed cost. You will have to pay that cost whether the bean price goes up or down.
By the third week of December, the cash bean price will have gained 10 cents of carry (January futures price is 10 cents above November futures price) plus basis appreciation of 30 to 50 cents; let’s say 40 cents. So, the net cash bean price to you on December 23rd will be 23½ cents more (50 cents carry & basis gain minus 26½ cents ownership cost) plus or minus the futures price change.
If you sell the beans now for $13.50 and take 55 cents of that money to buy an at-the-money January $13.80 call, you will maintain a long position in the bean futures market with the risk of loss limited to 55 cents.
If January beans are at $13.80 on expiration day (December 23rd):
The basis and carry would gain 23½ cents with no futures gain if stored.
The call option would expire worthless, losing 55 cents.
If January beans are at $14.00 on expiration day:
The basis and carry would gain 23½ cents plus 20 cents futures gain = 43½ cents net if stored.
The call option would be worth 20 cents, losing 35 cents.
If January beans are at $15.00 on expiration day:
The basis and carry would gain 23½ cents plus $1.20 futures gain = $1.43½ gain if stored.
The call option would be worth $1.20, net profit of 65 cents (sell at $1.20 minus 55 cent cost).
If January beans are at $16.00 on expiration day:
The basis and carry would gain 23½ cents plus futures gain of $2.20 = $2.43½ gain if stored.
The call option will be worth $2.20 cents, net profit of $1.65.
If January beans are at $13.00 on expiration day:
The basis & carry would gain 23½ cents less a futures loss of 80 cents = 56½ cent loss if stored.
The call option will be worth nothing, losing 55 cents.
If January beans are at $12.00 on expiration day:
The basis and carry would gain 23½ cents minus futures loss of $1.80 = $1.56½ loss.
The call option will be worth nothing, losing 55 cents.
You did not ask, but I suggest you consider storing for two months then switch to a July basis contract or sell the cash beans in December and buy futures. Either of them will net you 10 cents more each month than storing and the market risk would be the same.
The easy money is the basis appreciation from harvest to post harvest plus the 10 cents carry to January. Right now, there is another 20 cents of carry from January to July, but basis would have to firm 31 cents to breakeven on the ownership cost.
Of course, if bean futures go up $3 by May or June, one would think storage would pay. Nope. You would have $13.50 tied up waiting to make $3 and paying 10.6 cents per month to boot. You can sell the cash beans when storing no longer pays and use $1 as margin to buy beans in the July futures.
If you do a basis contract in December, you probably would get 70% of the cash value and tie up $4 to earn another $3.
Which is better:
turning $13.50 into $16.50 and paying 10.6 cents a month to do it or
turning $4 into $7 and paying interest of 2.4 cents a month or
turning $1.00 into $4 and paying interest on $1 (a half cent a month)?
Marketing decisions need include money management.