By Jon Scheve, Superior Feed Ingredients, LLC
Not much is exciting the markets right now beyond the coronavirus, and until more is known about its effects and how it spreads, the market will likely remain under pressure.
Preventing the spread of “free” DP
February is when free storage from “free” DP (deferred pricing) starts being advertised throughout most of the Corn Belt. While some also call it “price later opportunities,” or “delayed pricing” it refers to when farmers sign over their grain to an end user, and then wait to price the grain at a later date hopefully at higher values.
On the surface, DP seems like a win-win for farmers and end users. DP is a great way for end users to get a supply of grain during the winter. And, farmers can move their grain now when they aren’t busy, and price later during a potential rally. However, DP actually ends up hurting ALL farmers, those using it and those that do not.
Why does it hurt all farmers?
When end users extend this program, it’s usually because they are having difficulty procuring enough grain to meet their needs. Typically, free DP offerings spur a rush of quick ship grain and helps end users get through a month or two of difficult origination. However, this ultimately keeps prices artificially lower than the bids end users should be willing to pay for grain right now. In other words, why would end users push their market bids up when they are getting plenty of grain delivered?
How much are prices impacted?
The basis level suppression could be 10 cents or more. Last year provided a good example of what happens when end users have problem procuring grain. After severe planting delays last June, the entire country feared many farmers wouldn’t be able to plant their corn. Consequently, farmers quit selling because they didn’t know where prices could go. With most farmers not selling, corn basis values spiked 30 cents higher nearly everywhere.
If farmers didn’t take advantage of free DP, it could create a similar but smaller version of the basis spike that happened last summer.
But DP offers several conveniences to farmers
True, some farmers argue that with free DP they don’t have to worry about their grain’s condition in the bin or when to move it. Plus, they get the flexibility of being able to sell at potentially higher prices down the road.
Again, these conveniences seem good on the surface; however, the farmer has limited their pricing opportunities. This is because the farmers are now committed to that end user and their offered prices, and usually that means current month basis bids run at lower values compared to forward bids. This discounted price is part of that cost for the “free” DP.
Another problem with free DP is when farmers place a sale order on their DP grain, it is usually for a cash price sale. This enables end users to know the price that many farmers are willing to sell at, because they can see all of these DP user orders. If many farmers pick the same price point to sell their grain, the end users can then fade their basis bids back as that price approaches. While this basis fade may only be 2 to 5 cents, that “free” DP just cost the farmers a little bit more money.
Just a few farmers using free DP hurts all farmers
It only takes about 20% of farmers in an area to commit 50% of their production to “free DP” for end users to procure about a month’s worth of needed production. This can bridge end users until the next round of farmer selling right before planting season, and suppress prices for all farmers locally who need higher prices to be profitable.
In grain marketing nothing is ever free
There are always hidden costs, and for “free DP” the hidden costs hurt ALL farmers not just the ones that participate.
So, encourage your neighbors to not use free DP. Tell them the common nicknames for farmers using DP….like Delaying Problems or Dumb Producers. Tell them that end users see it as a way to Double Profits. Explain how free DP users help to suppress prices for all farmers. Or tell them how they are now locked into using an end user who knows what many local farmers are willing to sell their grain for, and how that will keep prices artificially lower. Tell them the minor conveniences they are getting come at a huge cost to not only them but YOU too.
Remember only YOU can prevent the spread of free DP.