Ed Marshall III would probably make a pretty good grain marketer — if his crop production didn't get in the way.
“The way I figure, I can produce a crop, but have never felt like I had the time to market it,” says Marshall. “So many think that as a farmer, they have to do it all. But it's more profitable to hire someone to do my marketing.”
His soybean marketing often starts 12-18 months before harvesting a particular crop. And for his 2006 beans, the Southeastern Missouri grower had a solid profit locked in on much of his expected production long before it was planted.
Sales in the $6.50/bu. range were made in July 2005, far above his projected breakeven at about $6. Add to that a plus-basis, and he had a good price to start at for '06.
Marshall is a third generation grower only minutes from the Mississippi River outside Charleston, MO. His rotation features about two-thirds of his acres in soybeans and one-third in corn and/or grain sorghum. He also counts on wheat as a major crop.
Most of his efforts go into producing 40-50-bu. beans, 160-bu. corn and solid wheat and milo yields. For marketing, he turns to Hurley & Associates, a Charleston-headquartered firm with offices from Canada to Corpus Christi, TX.
Ed Case and other associates at Hurley work directly with Marshall. “We figure Ed has a soybean breakeven of about $6/bu.,” says Case. “If above that is what he needs to meet his profit goals, then when the market gives us an opportunity to lock in those kinds of prices, we will be active to do so.”
The early marketing moves for the '06 crop began with selling November '06 futures at $6.50 in July '05, a time when soybean prices were up. That position remained in place through early this summer and looked like a price that would be pleasing at harvest.
Case often supports a “distant” futures price with a call option to keep the upside open. With such a move, Marshall or other customers would not be locked into the set futures price, but would be protected if harvest prices went lower.
“For Ed's $6.50 positions, that was already a good price for him. So no calls were needed (even though signs of a major upswing in the market could cause that strategy to change his fall).”
Along with the $6.50 futures, which give Marshall about a $6.70 cash price with his 20¢-over basis, other futures contracts are in place to make sales at about $6.30 and $6.35.
“There are $7 call options in place to cover the upside in the event prices rally,” says Case, adding that some 2007 soybean marketing is already in place for about 10% of Marshall's expected crop. Those November '07 futures positions provide an early $6.30 floor.
“Ed has confidence in his ability to produce, and he trusts us to help with the marketing,” says Case.
Marshall receives an e-mailed printout that documents every transaction, so he's never in the dark when trades are made.
He particularly likes the steps that lead to making actual marketing trades. “The thing I like is that they help you figure your breakeven, something too many growers probably don't take much time to do,” he says. “We go over everything it costs to put a crop in, then turn around and plug in your average production and what it will take to make a profit.
“They tailor a plan for me. I like that process. That's a little different than most, who try to hit the top. If we knew where the top was going to be, we wouldn't have to farm, just use futures,” says Marshall.
Market trends have been somber for soybeans most of this year. Opportunities to make early '06 soybean sales were slim through the spring and summer. Bearish news hit soybean markets after USDA projected fewer corn plantings this year due to higher fertilizer costs. After the government revised its March plantings to show an increase in corn acres, markets did not escalate the way growers wanted.
The June USDA supply-demand report showed ending soybean stocks for this year at 570 million bushels. The ending stocks for next year are projected at a whopping 655 million. Production numbers showed bean carryout rising 75 million bushels over last year.
Al Kluis, president of Northland Commodities, Minneapolis, MN, encourages growers to watch for price increases caused by drought or rust scares that could follow summer storms.
“If they can get a futures price of $6.40-6.50, they should look at getting downside price protection for 40-50% of their crop,” says Kluis.
He adds that a follow-up second strategy would be for growers to look for a $6.90 futures price, then buy $6.60 out-of-the-money put options on about 30% of their crop. “There is about a one-in-three chance of that occurring,” he says. “But if it does, growers could have at least 40% of their crop protected with a $6.40-6.50 futures contract and another 30% cover at $6.60 (less a small premium) with the upside open.”
Marshall doesn't worry about missing marketing opportunities like those specified by Kluis. He would rather worry about making sure his crops are producing to their ability and let the constant marketers pull the trigger.
With the huge carryover of old-crop corn and soybeans, growers should store beans everywhere they can to prevent being hit with a “horrible basis,” advises Chris Hurt, Purdue University grain marketing economist.
Old-crop stocks, plus further market pressure from new-crop production will likely have harvesttime soybean prices in the low-$5/bu. range, he says, barring weather problems or other factors.
“But we could easily see $6.50-7.00 (cash) beans next spring or summer, as well as a much better basis,” adds Hurt. “So just about the only thing you can do for now is store new-crop beans and wait.”
But where do you put them?
There is better incentive to store corn due to basis levels that are expected to improve by 40-50¢/bu. by next spring. Soybeans will likely see a stronger basis as well, but not as profitable as for corn. On-farm bins will likely consume more corn, much of which is old crop from 2005 and even 2004.
One advantage may be the grain elevators' ability to store corn efficiently outdoors on concrete pads to free up some space for beans.
“If growers can find soybean storage for a cost of about 15¢/bu., it would probably pay to store,” says Hurt. “They could probably pay up to 25¢ for 6-8 months of storage.”
Growers should check for incentives from elevators for bids for harvest, in January and out to May.
“I think basis levels will improve substantially — if they can just get to January,” he says.
If storage space is unavailable, then a call-options strategy might be a feasible alternative, says Hurt. That would enable growers to sell at harvest, then take advantage of higher prices in the spring or summer.
“But they will still likely face a weak basis this fall,” says Hurt. “Unless there are weather-caused crop production problems, this will be just another ugly fall for soybeans.”