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Frequent Contributor

How to protect my equity in corn silage.

I have about 5000 tons of corn silage and about 10000 Bushels of High Mositure Corn for my dairy.  I wanted to know if anybody could give me some good ideas on how to protect the equity in this feed .  I felt terriable when a few years ago when I watched my equity vanish as the corn price fell. 

 

I deal with a broker for soybean meal and milk marketing , but he had never heard of anyone doing this.  I think it would be a good idea.  I figure stored corn silage is worth the price of corn time 10 plus 5 dollars.  So right now thats about 250000 dollars worth of corn silage.

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7 Replies
Senior Contributor

Re: How to protect my equity in corn silage.

Silage is feed. One could by puts or futures, but it seems costly, inefficient, and indirect. If you are feeding it to your own cows then buying protection on milk should protect your investment - but I don't know what milk is doing. Milk is your end product. If it is below the COP then protecting silage seems like just an added expense.


If you were SELLING silage and HM corn, then it's a different matter.


Maybe you should sell your cows?

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Frequent Contributor

Re: No need to Your're feeding it!

You have no reason to protect your equity. It's your's and you are feeding it. You may want to place a value on your feed to determine the cost of production of your milk. Maybe your wanting to speculate by buying contracts of corn to put a little more $$ in the sock. I use to debate with my neighbor about the cost of production for his hog operation. His thought was that he could raise corn a lot cheaper by feeding it through his hogs. I always tied to explain that they should be treated as two differant operations. The corn he produced should be valued at elevator price when it is fed to the hogs. I emphasized that He could either sell it or feed it. Anyway he is contract feeding hogs now

If you have $250,000 of silage and you want keep open the top side  before you send it through your cattle buy roughly 10 - 12 contracts of corn on the CBOT. As you use the corn sell off contracts. This will work in a Bull merket. You'll be long on the CBOT and as the price goes up there will be a ching a Ling in your commodity account, Then when you feed it to the cattle you need to write in higher feed costs. Which is really inconsequential Now if the CBOT price goes down you'll get the call from your broker and he'll be coughing telling you he needs margin call. Then you pay the margin call but remember you'll be making more through your cattle from cheaper feed but that will go to pay for margin calls. Or maybe I should say," you may not lose as much in your cattle operation".  Good Luck! I am think markets are going up. Correction: Will continue to go up!

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Frequent Contributor

Re: No need to Your're feeding it!

I am trying to treat it seperately , that is why I think I need get some protection on feed price.  If I was buying the corn silage all the smart guys would be all over hedging to control my cost.  Well I grew it so why should I not hedge against it going down.  The milk price does not seem to follow the feed price directly.  .  If corn drops I lose my ecomomic advantage to growing my own corn.

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Frequent Contributor

Re: No need to Your're feeding it!

You have the Feed and use it. I think your're trying to reason out an explaination or reason to speculate in the market? You have a cattle operation. You have a crop enterprise. and now for entertainment you are acquiring the need to speculate? Nothong wrong with a little speculation, It keeps the heart pumping and it definitly improves wtll teach you your marketing  skills lessons.

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Senior Advisor

Re: No need to Your're feeding it!

I don't understand what you are trying to accomplish. All you have to do is establish a value now and that is the cost of your feed. Yield per acre times acres chopped times value per acre plus processing. If the corn is yield 200 bushel per acre times $4 per bushel that would be $800 per acre plus the processing cost and value of the roughage.

 

So you have apretty good idea what it cost you to produce that ton of silage and that is it's value going into the ration. However, if there is a chance you may choose to sell the feed as forage to a commercial feeder, then you may want hedge those bushels at given prices. But if your merely going to feed it yourself you need only to establish current value and charge it off against the cattle fed.

 

I can understand you wanting to operate two different enterprises. Producing feed and the dairy.. Thus you know which enterprise is producing the best return. Feed production or milk production.

 

However, I see no sense in hedging the corn unless you may choose to sell the feed later to a commercial feeder or you want to spec to the downside on corn.. Your feed is worth what it is today and you choose to feed it or sell it.

 

 

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Veteran Contributor

Re: How to protect my equity in corn silage.

What if the price goes up?  You sell your crop at a profit and you could have a big enough loss milking to wipe it out.  Total equity is more important then feed equity. The only way I would do it is if I had the ability to quit milking and sell my silage.  Neither of those is probably a great options.  If I was a farmer with a feedlot and had dry corn I would think about it because it is easy to sell dry corn and it is esay to stop and start in a feedlot enviornment, but in a dairy I wouldn't want to sell all of my cows today and buy back new ones in a month or two and there probably isn't a very good market for corn silage in a pit.

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Contributor

Re: How to protect my equity in corn silage.

We chopped on Saturday so I know your thoughts on protecting the value.  What we chop is a small part of our corn acres and is mostly looked at as a cost of feeding cows.  If we did not chop we would have more acres in hay so it is just kind of a trade off. 

 

Now to your question I would think using an options strategy would be the way to go.  Buy puts and sell call to cheapen up the puts.  If corn prices stay in the  range nothing happens, if prices go lower you collect on your puts, and if corn goes higher you would have to margin the calls or exit that position before that happens.  Or you could just sell futures using varying months throughout the year.  Selling futures would offset being long a pile of silage.  Of course your position would move penny for penny with the board and could also be subject to margin calls. 

 

A quick note our federal crop appraisal came in at 209.8 bu/ac,  this is down from last year but it was not in the same field.

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