Balance Your Approach to Soybean Marketing
This week’s much-anticipated World Agricultural Supply and Demand report left farmers somewhat perplexed as to what marketing approach they should execute in the soybean market. On the one hand, projected carryout did drop 25 million bushels to a snug 220 million. On the other hand, bullish traders were expecting more of a decline in carryout. This was reflected in the market when November futures closed 20 cents lower. As expected, yield did decline from 50.9 bushels per acre to 50.1 bushels per acre. However, a cut of 45 million bushels from projected exports allowed for carryout to remain above 200 million bushels.
Why this is important…
Many believe the final yield is subject to a further downgrade due to hot and dry conditions the last several weeks during the key pod-filling window. Additional production cuts could suggest a carryout number closer to 150 million. If that is the case, November soybean futures near $13.50 are likely too low, and demand may have to be rationed. On the other hand, the harvest is gearing up, and typical price pressure during the next 30 days could suggest a drop to under $13.00.
What can you do?
Soybean futures are in the upper 25% of the recent trading range and well off the recent low of $11.30 from early summer. A strategy to consider is selling cash soybeans and retaining ownership with a fixed-risk option strategy. A bull call spread is a fixed-risk strategy in which the buyer purchases an at-the- money call option while selling an out-of-the-money call option. Any futures months can be used, with March an ideal candidate, as it provides an appropriate time period to retain ownership. This strategy could be viewed as a conservative way to enter an ownership position. By selling cash soybeans, you have done away with downside price risk and the cost of storage. The bull call strategy allows you to participate in a price advance. There are a couple of drawbacks with this strategy. You could lose the total investment to re-own. In addition, the bull call spread has a fixed profit.
The risk of prices falling apart is eliminated because you have sold cash beans. You have generated cash flow. This is important, as higher interest rates have a real bite. The key, however, is you have now removed much of the emotion of making decisions. Have a thorough conversation with your advisor. Learn about strategies that best fit your operation’s needs. Then, execute before the opportunity window closes.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
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