Soybean South

 - MARKETING -

Bean Prices Stun The Industry

Some factors that have pushed soybean prices up include lost acreage to corn last year, insufficient expansion in South American acreage, increasing demand out of China
and the influx of additional speculative money into commodities.

By Joe Carney

 
In the span of just six marketing seasons, the expected average farm price of soybeans has more than doubled. According to the most recent statistics released by the USDA, the average price growers can expect for soybeans for the 2007/2008 marketing year is anywhere from $10 to $10.80 versus an average of $4.38 as recently as the 2001/2002 marketing year.

New crop prices for this year should be even higher with the November 2008 soybean contract trading as high as $14.66 during the open-outcry session on March 4. While the market has seen a significant correction over the past few days, it is still above the $13 mark and not likely to fall too much farther without a run back to the upside.

It used to be that a good marketing plan involved picking the right spot to lock in your LDP and then getting a small rally in the futures markets so you could sell your cash a little higher, and a $6 net price to you was a really good return. Today, we have growers who sold new crop soybeans at $8 net to them less than six months ago who are extremely unhappy about letting just a portion of expected production go at that level, and there are some producers who have already sold all of the soybean crop that still has to be planted this spring.

There are many factors that have pushed soybean prices to current levels, including lost acreage to corn last year, insufficient expansion in South American acreage to offset the smaller crop in the United States, increasing demand out of China that has been exacerbated by weather-related losses in its rapeseed crop, the ongoing competition with corn for new crop acres and the influx of additional speculative money into commodities.

Will basis levels improve?
Input costs continue to rise along with soybean prices, and what was a profitable net price even last year will not get the job done this time around. Ag lenders are growing increasingly reluctant to finance the margin calls generated by hedging prices on the board, and many elevators have made basis levels so wide that they make hedge-to-arrive contracts unattractive.

As far as the basis goes, levels are not likely to improve too much even with the big drop in prices because the elevators are paying margin calls as well. This makes access to storage a key element to maximizing farm income, even if you store beans just long enough to get through the heaviest delivery period just after the harvest.

Not everyone has access to storage, so you have to be willing to sell beans on the way up instead of holding out for the top. This is especially true if you have already marketed a significant portion of your expected production. What looked like a prudent cash sale as little as three or four months ago doesn’t feel so good right now, but that does not mean that you should not take advantage of $13 beans.

We still don’t know what acreage will look like this spring, and there is a long way to go toward producing this crop. What we do know is that this will be an extremely volatile summer even without a weather scare, and I don’t remember too many summers without one of those.

Be flexible in pricing your crop If you have yet to price any new crop beans, then good for you. You should immediately sell at least a small percentage of what you expect to produce. You have been rewarded for having patience but do not let that prevent you from locking in an excellent cash level. If you have already priced a portion of your crop, you can still have resting orders for additional coverage.

If you have already sold most or all of your beans, then be mindful of good pricing opportunities for next year. The marketing of one crop year can actually encompass two or three growing seasons, and it can be a great deal to keep up with, especially while you are trying to produce the crop.

If you need help, look for a qualified crop marketing firm. Let them shoulder some of the burden for making difficult marketing decisions. That is what they do, and it allows you to focus on what you do, which is produce the best yield you can. There are several ways to hedge your crops in the futures and options markets, and your crop marketer should be able to devise a strategy that best fits your needs.

The bottom line is that no one is going to be able to pick the top, and you need to be flexible in your ideas toward pricing your soybean crop.

As we have already learned over the past several months, what used to be an unbelievable cash price is now a disappointment. Do not be afraid to let some cash go even if you think the market is going higher. It may, but it still makes sound financial sense to take advantage of profitable price levels while keeping an eye toward the future.

Have a plan in place
The recent sharp sell-off in both old crop and new crop soybeans is a prime example of two things. The first is that the markets always go farther than they need to in both directions, and, in doing so, they provide excellent opportunities to not only sell the cash commodity, but to also put on hedge strategies to maximize income and even reown priced production at lower levels. The second is that there is an opportunity every day, and you need to have a plan in place in order to take advantage of what the market gives you.

This is not to say that using the futures and options markets are not without risk, and anyone who has been paying margin calls can certainly attest to this. The increased volatility has raised margins and forced many producers with legitimate hedges out of the market, so you must be careful to understand your upside and downside on any given trade.

Do not be afraid to sell your cash commodity in these rising markets. If you have already sold a portion of your production at a lower level, then you can increase your average. You can always hold a portion of the crop off the market until you know you will have it, but simply waiting until harvest and then selling your crop as you deliver it to the elevator will usually not only give you a less than desirable price relative to current market conditions, but you will also get the worst possible basis in most cases. You need to have a marketing plan, and if you don’t come up with it yourself, then find someone who can help.

Joe Carney is a partner at STA Trading Services in Memphis, Tenn. Contact him at (800) 781-0747 or joe@iamhedged.com. STA Trading Services is a crop marketing and biofuels consulting firm.