With good weather in South America, Brazil will surpass the U.S. in soybean production during the coming growing season. Since weather has been a major issue for both South and North America during the past year, that qualifier has significance. It will take normal weather in Brazil for the expected production to be reached, which would be nearly 22% above the crop in early 2012. But additional acreage from newly developed land will help with the task. How will that impact U.S. soybean prices and how should that be worked into your marketing plan?
Reports from South America indicate planting progress has been slowed because of dry conditions in central and southern Brazil, as well as too much precipitation in Argentina. And continued rain there will undoubtedly shift some corn acres to soybeans. So how will more Argentine beans and possibly more Brazilian soybeans affect the U.S. soybean market? Iowa State University Economist Steven Johnson contends there are some immediate marketing opportunities and producers should take action to protect their opportunity for higher prices in coming months.
With soybean futures $3 lower than the August highs, many farmers may be reluctant to sell, but looking at soybean futures in deferred contract months, they are lower than nearby contracts. The soybean market has an inverse to it, not a carry, which pays for storage. Johnson says the market wants soybeans now, and is not willing to pay for future delivery, and the last time that happened was in the 2003-2004 marketing year. In that growing season, Johnson says the soybean crop was also short, like 2012, due to weather related problems.
Looking at the charts from that year, Johnson says November futures traded around $8/bu. after a move higher from the $5 range. But at that time, the May futures traded at 50¢ under the November contract. Both then and now, he says the market wants soybeans. Johnson says the lesson learned from 2003-2004 was that prices would rise when the supply was used up, and when May of 2004 arrived, the bean market made a double-top in the $10 range. That was not expected, due to the inverse carry in the market just a few months earlier.
Is that what will happen to the 2012 crop, and when the market gets all the soybeans it can obtain, will the inverse carry disappear and the soybean market climb again next spring? Johnson believes the market fundamentals are currently in place for that to happen. So how should someone with beans in the bin, work the market? Johnson suggests unloading cash beans now to prevent the market from declining as it appears it is with progressively lower prices through next summer. With the proceeds, Johnson suggests purchase of a July at-the-money call option. The lower price of the July contract will reduce the cost of the option premium, and the option eliminates the risk of lower futures, should the market not return to higher prices.
Would the strategy have worked in 2003-2004?
Johnson says the strategy would have worked handsomely nine years ago. And he says if futures rally on continued concerns of South American weather, owning the call option could be more profitable than owning the soybeans with the cost of storage and interest. As prices rose in 2004, and as prices may rise in 2013, you would sell the call option to capture greater profits.
The soybean market is paying for soybeans now, and offering much less money through next summer. At that time, the inverse carry would be reflecting the expected large supply of soybeans coming from South America. While soybeans hold more value now than they will next spring, selling cash beans now and purchasing a July call option will allow the holder to recapture some of the higher prices that could occur for soybeans, should there be weather problems again for Brazilian and Argentine producers.