Farmers attending the Pro Ag Outlook & Marketing meetings which are getting underway this week in Iowa, sponsored by Iowa State University Extension, are wondering whether it is time to recalibrate their marketing strategy for 2012 soybeans they have stored in the bin. ISU Extension grain marketing economist Chad Hart is providing some insight on the situation. Down-pressure on soybean prices continues and futures prices are now trading at three-month lows.
As a result of the drought of 2012, the U.S. is at risk of losing its top position as the world's largest soybean producing country. The forecasts are that Brazil will replace the U.S. as the top producer of soybeans during the upcoming 2012-13 harvest season. This forecast assumes normal weather conditions in Brazil for planting and production. Brazil plants beans in the fall and harvests in February and March.
Soybean production in the U. S. for 2012 is expected to drop 7.5% from 2012, according to USDA's October estimates. Production in Brazil is expected to increase 21.8%. Much of the increase in planted acres is the development of more land suitable for growing beans. USDA will update those numbers on November 9 when it issues its monthly World Ag Supply & Demand Estimates for November.
Planting progress in both Brazil and Argentina has been slowed thus far this fall. Dry conditions exist in central and eastern Brazil and too wet in southern Brazil and central Argentina. Weather will be key as to the final size of the South American crop. Continued rainfall in key growing areas over the might actually mean some corn acres will be switched to beans.
How is U.S. Supply & Demand shaping up for 2012
By mid-October, the nearby soybean futures contract had fallen to three-month lows approaching $15 per bushel. USDA increased production but reduced demand for U.S. soybeans in the October 9 WASDE (USDA's monthly World Ag Supply & Demand Estimate report). Now, the futures market bulls have faded. With the historically high cash price levels at harvest, many farmers sold much of their crop right off the combine.~~~PAGE_BREAK_HERE~~~
There has been some near-term technical damage inflicted in soybean futures, as seen on the weekly soybean futures chart above.
An uptrend line remains at the $15 per bushel level. There are now warning signs that the soybean futures market has put in a major top. However no serious near-term chart damage has been inflicted that would confirm a bottom has been established. Expect nearby futures prices to remain well supported until adequate production in South America can be confirmed.
Marketing strategy-what to do with unpriced old crop soybeans
"For those farmers who are still holding unpriced old crop soybean bushels, it becomes important to have a price and time objective in mind," says Steve Johnson, an ISU Extension farm management specialist. "Look at your local cash basis as well as futures market carry. Seasonally basis narrows following harvest and should remain very attractive as processors need to offer a competitive basis to get farmers to sell their bushels they are still storing."
Regarding futures market carry, this is a condition that rarely occurs, has developed this fall, notes Johnson. The nearby January futures are higher than the preferred March, May and July futures contracts. Under normal conditions, a premium is added to the price level of these deferred contracts as incentive to store bushels to justify the cost of storage and interest for owning the soybeans for those months.
This year the situation is reversed. Buyers of soybeans for processing are signaling that they will pay a premium to source the beans now, not next spring and summer.
The last time this situation occurred was in the 2003-04 marketing year, says Johnson. The crop was cut short by weather problems similar to what occurred in 2012.
On November 1, 2003, the nearby November futures traded around $8.00 per bushel. At the time it seemed extremely high because they began the move from around $5.25 per bushel. However, the May 2004 soybean futures contract traded at roughly a 50 cent per bushel discount to the November 2003 contract.
Market was screaming for cash bean to be delivered in fall
"The market was screaming for cash beans to be delivered in the fall, not held until the following spring," notes Johnson. "What we did not understand in 2003 was that the big inverse was telling us that prices would be higher when the supply of cash beans got used up."~~~PAGE_BREAK_HERE~~~
By the March-to-May 2004 time period, the May soybean futures contract made a double top in the $10.5 per bushel area. What one could not see is that in November 2003, the soybean market would rally nearly $3 per bushel despite the inverse carry. "There is no way of knowing whether a similar move will happen in 2013. The fundamentals are in place, however, similar to the way they were in the 2003-04 marketing year," says Johnson.
There are ways to take advantage of this unusual market situation
Besides holding beans in storage, there are ways to take advantage of this unusual situation. This is one time when selling cash soybeans and buying a call option has higher odds of working well, he adds. Selling beans with nearby January futures over $15 per bushel and buying a July 2013 at-the-money call option eliminates the cost of ownership and the risk of lower futures prices. The cost of the transaction would be the cost of the premium for that call option subtracted from the cash selling price of the beans.
This strategy would have worked very well in 2003-04 marketing year. "If futures prices rally with South American weather concerns," says Johnson, "owning the call option could very well be more profitable than owning the cash soybeans with a fixed cost of storage and perhaps interest."
Consider selling cash beans this fall, buying a call option
Conclusion: The drought of 2012 resulted in high soybean futures prices. As a result, demand for U.S. soybeans declined with the high price and Brazil and Argentina are expanding soybean planted acres. Soybean futures prices peaked in early September and are now trading at three-month lows.
Weather during the next few months will be critical to determining the direction of soybean futures price, notes Johnson. While basis should remain strong, the futures carry is actually an "inverse market." It's still possible for futures prices to rally this winter or spring, especially with weather concerns in South America.
A strategy to consider this fall is selling cash soybeans and buying a call option to replace these bushels. The cost of the transaction would be the cost of the premium for that call option subtracted from the cash selling price of these soybeans.