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Napanee, Ontario | No Horse in this race, but...
I would think that if a guy is looking at a loss on the Dec 15 contract right now @ 3.94, it is because of fixed costs. Land payments, rent, or equipment..ect.
I think that when you take the fixed costs away, $4 corn still covers all the variable expenses easily and then some. Meaning that anyone who has little to no fixed costs (land, equipment, buildings paid or nearly paid for) is going to be profitable with $4 corn, and is going to grow the crop.
And anyone who has these fixed costs has to cover them... which means they have to plant a crop to attempt to do so. Buying the board in the latter position is a massive gamble, because you need to make more profit on the board appreciation than you could make after your variable costs with $4 board..
In accounting we call that gross profit (revenue less variable costs (costs of goods sold)). I think the proposition you are pondering becomes viable only when gross profit declines to a point where there is little or none left. I think that at the current stage, there is still likely about $1-1.50, or even more, of gross profit. That is probably even conservative as i know people who could put up a crop for about under $2 a bushel in variable costs. We only do silage corn ourselves, but we would probably have about 2-2.15 a bu in costs based on picking yields around here.
If Gross profit is already in a loss, it is indeed better to buy the board. A that juncture, buying the board at least starts you even wherever you initiate your position...vs already being in a loss growing the crop. If the price declines further you lose on the position, but less than if you would have started from a higher cost floor growing the crop.
If you are in this position - and again, i don't know how someone couldn't cover variable costs here with $4, but if you are, that is when i would start considering your proposition.
The other choice is to cut the fixed cost. That is very hard for a lot of guys to do.
Edited by OldMcdonald 10/20/2014 12:17
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The lower Cbot goes dec 15
