TOP FARMER WEEKLY PERSPECTIVE 12/23/2022 BY BRYAN DOHERTY

Soybean Futures at a Critical Crossroad: Defending Prices

March 2023 soybean futures peaked at $15.08 on September 13 before sliding on harvest pressure to a fall low of $13.88-1/2 on October 26, or a change of 8%. After finding a low, the market rebounded and peaked on December 9 at 14.97-1/4. The last time March soybeans closed above $15.00 was June 21. Since June 21, March futures have traded above $15.00 only once. On 24 occasions, they traded above $14.75 (as of 12/19/2022). The market is on the verge of breaking resistance. Yet, if futures fail, you might be missing one of the best pricing opportunities of the year for your soybeans in storage.

All attention will focus on South American supplies. Keeping price rallies in check are expectations for record South American production and concern that China, the world’s largest importer, is struggling on two fronts: 1) surging COVID, and 2) a significant economic slowdown. This Perspective will outline various strategies to consider if you currently have soybeans in storage.

Strategy One: Continue to store your soybeans. Here you are taking on market risk, storage cost, and basis risk. Tight supplies could mean that, if growing conditions are less than ideal, U.S. soybean prices could be on the verge of a rally. The downside to this strategy is having your cash tied up, and subject to price movement, storage cost, and basis risk.

Strategy Two: Sell your soybeans. You will have taken advantage of a post-harvest rally, generated cash flow, and eliminated all risk. The downside is you are now out of the market. What if prices rally?

Strategy Three: Sell your soybeans, which generates cash flow and ends storage costs and basis risk. Then, reinvest a portion of your sold soybeans in a re-ownership strategy with a fixed risk. These strategies could include buying a call option or a bull call spread. The call option gives you the right to own futures (not the obligation). Risk is subject to the premium paid, commission, and fees. A bull call spread is where you purchase a call option and sell an out-of-the money call option. This strategy is generally done when you believe the market will go up, and only by a limited amount. The sold call option premium helps to offset the premium of the purchased call. This strategy has both a fixed risk and fixed gain potential.

Strategy Four: Buy a put and keep your soybeans. One would buy a put to establish a price floor. Your risk is fixed to the purchase price of the put (plus commissions/fees), however, your unpriced soybeans are subject to cash market risk and cost of storage. The put is often used when someone feels that cash, futures, or both will improve. Still, they want to have a futures price floor established for the length of time, depending on which month is purchased.

Consider all strategies and learn the risks and rewards of each one. Consult a professional to help you determine which is best suited to your operation. The soybean market appears on the verge of heading higher, yet market trends can – and do – change abruptly. Prepare yourself for expected and unexpected market moves. Have a strategy in place to help you manage the market volatility – rather than it manage you.

If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Author

Bryan Doherty