What are you doing about all the beans you’re storing?
Yes, you like to grow corn and talk about corn, but have you paid any attention lately to the soybean market?
At the end of the harvest season, beans are now at levels not seen since mid-September, and soybean futures climbed 80¢ since earlier in the November. Beans have some octane. And since $13 (beans in the teens) is your benchmark price, your marketing plan may need a jumpstart on implementation. Let’s do that.
Corn has been relegated to a supply-driven market after five years of increasing demand. However, soybeans are still in a demand-driven market and are begging for attention, even though the lofty levels of last year’s short supply are now history. Nevertheless the market is concerned again about running out of US soybeans unless some rationing occurs by exporters and crushers. Consequently, the nervousness of traders provides some opportunity for a soybean producer to take advantage of rising market prices. The key to success is managing your risk and not yearning for a few cents more at a time the market peaks into a long tail that is now characterized by the corn market.
Some farmers are out of beans because they saw $14 prices being offered for a good crop in early September. Good for them. Other farmers have beans on storage with no real marketing plan. Subsequently, interest, storage, opportunity cost are 5¢ to 8¢ per month depending on whether they are stored at home or in town. Iowa State University ag economist Steven Johnson also notes that you will likely have substantial income in 2013 that is taxable in 2014, so any marketing at this point should be done with the thought that income should deferred into the 2014 calendar year. Your marketing plan should also include a note about South American soybeans “getting off to their best start ever,” which implies that global demand may not be a driving factor in the soybean market. When the export demand shifts to South America after the first of the year, the US cash market may be more of your friend than futures.
If you look at futures prices, the first thing you notice is that it declines. From the $13.39 on Nov 27 for January beans, to $13.21 for March, $13.00 for May, $12.91 for July, and $12.62 for August, that nearly 80¢ drop does not pay for storage. Consequently, storage may be out of the picture for your 2013 soybean crop, since it is a money loser. So, what do you do?
Johnson’s suggestion is a minimum price contract, if Dad always said never sell beans in the fall. Some elevators will offer a minimum price contract, and you will pay a small merchandising fee for the elevator to set it up and execute it for you. You can do the same for yourself by selling your cash beans, and replacing them with a call option. Johnson says, “The concept is selling high (January futures) and replacing all or a portion of those bushels with something low (March futures). The logic might be in case South American weather conditions deteriorate and speculators continue to hold their record long futures contracts in that March contract.” He says an at-the-money $13.40 March call option is 31¢, and buying it gives you the right, but not the obligation to buy March futures at $13.40. With any kind of a weather issue in South America, soybean futures would rally. If they reach $14, your call is worth 60¢ (minus the brokerage fee). Beware that March options expire about February 21 and action must be taken prior to then for it to return any value to you.
Your grain merchandiser can take care of the paperwork for setting up a minimum price contract that sets $13.40 as your minimum price and lets you take advantage of any further rally in the market from the increasing value of your call option. Your merchandiser should also tell you that if the market does not rally and your call option expires worthless, your cost will be the 31¢ premium.
Johnson also notes that if you are deferring any income into 2014, ensure that you are working with a grain dealer which protects you from any loss of money due to the fact you would be an unsecured creditor.
Soybeans have demonstrated a healthy rally from their harvest lows due to concerns about a shortage of soybeans later in the year in the US. While global demand will be fed from South America, any threat to production will be reflected in the US futures market. Due to the market’s inverse for soybeans, which does not pay for storage, it may be wise to sell cash soybeans and maintain your ownership with a call option. Such a plan would protect you from any decline in the cash market and allow you to benefit from any rise in the futures market.
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