Balance Your Approach to Soybean Marketing
What’s happened…
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.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
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Bryan Doherty