It was a thrill to watch the launch of the new South American soybean futures contract on May 20, 2005, as trading started at the Chicago Board of Trade (CBOT).
The CBOT is expanding its global presence as it maintains its status as the world's market place for establishing grain and oilseed prices. With the marketing efforts now in place by the CBOT, odds are great that this contract will be a major success and another key market for soybean producers throughout the world to monitor.
In the first six months of trade of the new South American soybean futures, these are four of the key factors that I will be watching:
Volume of trade: I would like to see a daily volume of trade of at least 1,000 contracts develop with an open interest of 20-30 million bushels. If that level of trade occurs, the market will be liquid enough to attract the three key groups any contract needs to survive — local traders, retail speculators and commercials.
Price correlation: Does the new South American soybean contract just replicate what the existing CBOT soybean contract does or can it trade like the separate contract that it is? My hope is that this new contract with new traders and hedgers won't be a shadow contract, but will instead have a great deal of independent price movement. This will set up great arbitrage and spread opportunities. That trading will also increase the volume and volatility of both contracts.
Carrying charge: The existing CBOT soybean contracts usually show a carrying charge from harvest low (the November contract) to the January, March and May contracts of the following year. With the harvest in South America starting in February and getting into full swing in March, will the South American futures show a carrying charge from the May to November contracts? If so it offers South American hedgers a way to capture the carrying charge and delay delivering soybeans until their basis has improved. Having South American Soybean producers learn these basic merchandising skills will be one of the keys to success for this new contract.
Currency fluctuations: What impact will the strong Brazilian real and weak U.S. dollar have on South American and U.S. soybean futures prices? The impact so far has been positive for U.S. prices and exports at the expense of South American soybean farmers who have had not only low futures prices, but also a strong currency and the expense of rust to deal with. At this time I can't make any projections but will be watching the impact on prices in both futures markets.
With the continued strong export pace of U.S. soybeans, lower U.S. acreage than last year and now rust threatening U.S. soybean yields, prices of old and new crop soybean futures throughout the world have been very volatile.
At this writing I have suggested having 40-60% of the new crop soybeans priced ahead. I have used a combination of hedges and puts to get that new crop price protection.
If the November contract can get $7.80 or higher, I will likely make another 20% sale, again using a combination of hedges and puts.
For our South American readers, I have 20% of the new crop soybeans sold ahead into the May 2006 futures at an average price of $6.80; the next price target is at $7.40. If that target is hit I recommend in creasing new crop price protection up to 40% using a combination of hedges and puts.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want information, write: Northstar, 1000 Piper Jaffery Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: email@example.com.