If the LDP is triggered, use it with other marketing tools

By Tracy Sayler

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Prairie Grains is the official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain Growers Association,
South Dakota Wheat, Inc., and the Minnesota Barley Growers Association.

How the change would affect LDP payments for producers across the country— winners and losers— is still being debated, along with merits of the new proposed LDP structure itself. Some are advocating that the USDA hold off on unveiling changes until after this crop season. Whether or not a new structure is put in place this summer, there are lessons to be learned from last year.

"To us, the lesson of the last year and a half is that the producer who sits back and does nothing is going to get murdered by the markets. This market volatility isn’t going to go away. Too many producers sat back and waited for the price to go up. It didn’t and now they’re pushed in a big corner, with grain under loan coming due and another crop on the way," says Mike Krueger, vice president of Agri-Mark, West Fargo, ND (1-800-373-8123).

Producers must become more proactive at marketing, he says. Many producers realize the value of investing in inputs to produce a crop, but still don’t realize that the same concept applies to marketing: Budgeting time and money to strategic marketing tools will usually result in a larger price gain— or less of a price loss— than would otherwise be the case by depending solely on the whims of the cash market.

For example, Krueger says some producers focus on money lost from the purchase of a call option that isn’t exercised. Looking at the larger market picture, however, they may have lost what they spent on the call option, but received a better price in the long run by selling the grain earlier, rather than at a lower price later, plus storage costs.

"Invest money in market protection. If you can do it on your own that’s fine, but if you need help, then check out your professional alternatives."

Whether under the old system or under a new structure, keep an eye on LDP rates. Take the payment if the LDP is triggered at what you feel is a good price, and if you don’t want to put the grain under loan. Then buy a put option to protect a further slide in price. Or, forward contract the grain and take the LDP payment (while you still maintain beneficial interest) and buy a call option. "That way in case the market goes up, you won’t be left behind," says Krueger.

"If the LDP becomes a factor again, take the LDP when you think the market low is in. But also consider a put option," says Wayne Olson, account executive with Benson-Quinn Commodities and RML Trading, Grand Forks, ND (1-800-800-4618). "A lot of soybean producers last year took the LDP at 60 to 70 cents, and then a few months later, the LDP went to a dollar. A put option would have saved them a lot of money."

Judging on seasonal market lows, Olson says a LDP for wheat is most likely to occur in the July-August time frame, and October-November for corn and soybeans. Like Krueger, Olson agrees the use of a forward contract and a call option should be used with a LDP, if a producer believes the market has upside potential.

Randy Martinson, account executive with Progressive Ag Marketing, Fargo (1-800-450-1404) reminds producers that if the LDP calculations continue to be conducted daily, remember that generally, market movements one day will affect the LDP rate the next. Thus, if the market on Monday closes three cents lower, the LDP on Tuesday should be three cents higher.

Like Krueger and Olson, Martinson advises to use the LDP in conjunction with other marketing tools. "Look at it from a risk management standpoint," he says. "If LDPs become part of the equation, your local basis is low at harvest, and bids are weak, then look at a put option to limit your losses. If the market continues to fall after you’ve taken the LDP, you have a price floor under that grain."

"Taming the Bulls and Bears" is a market education feature of Prairie Grains, made possible by the Minnesota wheat checkoff administered by the Minnesota Wheat Research & Promotion Council. If you have a question or topic you’d like to see addressed in this feature, send it to: MWRPC, 2600 Wheat Drive, Red Lake Falls, MN, 56750. Phone: 1-800-242-6118. Email: mnwheat @ means.net.