Higher soybean prices do not create more profit unless you are positioned correctly.
This has been a challenging year for many farmers in growing and marketing their 2001 soybean crop. The late, wet spring had many upper-Midwest farmers wondering if they would ever get the crop planted. When the rains stopped, it turned hot and dry for the next six weeks. The soybean market, following its normal pattern, ignored the late planting problems but rallied sharply higher during July on hot weather concerns. As many farmers will find out this year, higher soybean prices do not create more profits unless you are positioned correctly. Last year's large yields and large Loan Deficiency Payments (LDP) at harvest are not likely to occur again this year. To insure profitability we suggest these five key steps:
First step: Look at your relative price level. If November CBOT Soybean futures drop back to $4.40-4.60, you have little risk in holding off on forward sales of new crop soybeans. For many producers with CRC or other revenue coverage, lower prices into fall can actually increase income. Our NorthStar Commodity spreadsheet analysis shows more income potential and larger LDP payments at $4 November soybean futures than at $6 November soybean futures.
Second step: Make sure you are familiar with the LDP program. I was amazed again last year at how many calls we had on days when the futures market was sharply lower and producers wanted to go in and lock in the LDP. When to lock in the LDP is a function of what the futures market does, what the basis does and the short-term price outlook. It's an easy program to use once you understand the basics.
Third step: Be aware of your local basis pattern. Find a way to hold off any cash sales when local cash basis is wide at harvest. With this year's smaller corn and wheat crop, farmers and elevators should have more than adequate storage available this fall. The improved storage situation combined with improving demand suggests rapid basis improvement once harvest is wrapped up. Odds are good that basis levels will be near the worst level of the year when you get this issue of Soybean Digest.
Fourth step: Monitor the carrying charge the soybean market is offering. For the last three years, selling soybeans right after harvest in the November - December time period has been the right merchandising and financial move for soybean farmers. The current futures alignment shows a 3¢ return for storing soybeans six months. Take the cash and convert ownership of some of your crop to calls or futures. Every dollar you save in interest is usually a dollar you can bring to the bottom line.
Fifth step: Think dollars per acre not dollars per bushel. With the current Freedom to Farm and LDP policy, maximizing yield, locking in the maximum LDP and then making the right merchandising decision is more important than ever. Producers who were disciplined last year locked in the large LDP at harvest and then sold for January delivery. Farmers then paid off their operating note in January and had a profitable year.
What to watch for: The worst-case scenario for farmers this fall is to harvest a smaller than normal crop and then November soybean futures rally to $5.40-5.60. This would eliminate or greatly decrease the LDP payment and greatly reduce gross income per acre. The best-case scenario is a large crop with very low soybean futures (and a large LDP) available during harvest followed by a significant rally into the December - January time period. You can't do much about the size of your crop now but by following these five key steps you can earn the most income possible.
Alan Kluis is president of NorthStar Commodity Investment Co. If you have marketing questions or want more information, write: NorthStar, 1000 Piper Plaza, 444 Cedar Ave., St. Paul, MN 55101; or call 800-345-7692.