Newsletter Archive

The downfalls of Free Price Later

Heart to Heart, March 2010 Connections

by Scott Stabbe

Finding someone who knows what the markets are up to lately is like finding someone who still likes snow and winter. That leads us to the unknowns of the market that seem to be more prevalent this year than normal. We’ve seen the market’s daily gyrations become more severe. Recently, the main market drivers have been the outside markets, or in other words, crude oil, the dollar and metals, as they are moved by the fund buying as well. The problem is the overall unpredictability. That will override market fundamentals at least for a time. The next big fundamental news we’re waiting for is the report in late March with the USDA’s resurvey results. It is supposed to show the bushels left out in the field. The January report listed those bushels out in the field along with the farm stored bushels.

We have started to have inquiries about when we might start to offer “Free Price Later” or, as some call it, “Free Price Less.” That seems to be what happens to most in the program. The draw back with Free Price Later (PL) is when all the elevators take the Free PL they need to move it out to sell. When they move it into the market/pipeline, some of the demand urgency is removed. That tends to drop the basis as the pipeline gets filled. So, without any kind of crop problem, such as late planting or dry summer, the market needs the funds to drive it higher. The board has to do all the work as the basis is taken care of by PL as it is moved out. Take a look at the chart of prices below and see what has happened in the past if you hold Free PL until later in the summer. One analogy to use is to try going to a car dealer and tell them you have a new program to move pickups. You tell them you will buy a pickup from them and take ownership now, but will not set or decide on the price until August or September after you have used it for 6 months. My guess is the dealer will say there is no way he can do that since you will not want to pay the full value after you have used it for that long. That is the downside of the Free PL. With this year’s crop and storage difficulty everyone wants to move it,  and rightly so. That is the exact reason we are trying to get most of our wet corn moved and dried as we continue to see warm spots. The benefit of moving grain is something to consider. However, you could do the same thing by selling and using options or a Minimum Price Contract in case the market would rally. That would ensure you have your money up-front in case the market runs up later and the corn is gone along with the quality concerns.

In the meantime the thing to do is CHECK YOUR BINS WEEKLY. Make sure they are level and have been cored to get the fines out of the middle in order to get maximum air flow. We cannot stress this enough. There is always the possibility of too much damage coming in later when no one can handle anymore. Then what? Remember, it takes just over a million bushels of one percent damaged corn to blend 60,000 bushels of 75 percent damaged corn down to 5 percent percent (max allowable for #2 yellow corn). Please be careful as you check your bins and have an observer in case something would happen.

Thank you again for your patronage.