I forward contracted 50 bu./acre and now I'm only harvesting 42 bu./acre. The rally in the soybean market is not doing me any good. I'm supposed to deliver 180,000 bu. at $5.60/bu., and I'll only harvest 150,000. How can you help me?” These comments came from a frustrated Illinois farmer in mid-September.
This farmer made several major marketing mistakes:
He forward sold ALL of his anticipated production by making just one huge sale of 180,000 bu.
He sold the entire crop using a forward contract — which really limits his flexibility in years like this when prices move higher. It's also more cumbersome in years when the price goes down and you need to work the LDP program.
He sold more bushels than he could guarantee using the crop revenue insurance programs, putting his farm at an unnecessary financial risk.
Assuming you still have some soybeans to sell, what's the game plan now?
At Northstar, at the time of this writing, we have 40% of soybeans hedged ahead. The first 20% hedge was made when November futures hit $5.80 and the next 20% when November futures hit $6.40.
A simple plan now is to watch January futures. If prices rally up to $6.90, take sales up to 60% and, at $7.20, sell up to 90%. The last 10% are the beans you'll take a lot more risk with. They'll likely be sold a lot higher or lower next summer.
If you use call options, consider buying the May CBOT $7-8 call spread on 50-75% of your 2003 soybean production. When and if May futures rally to $7, let all of your cash soybeans go and maintain ownership with the call spread. Is this risky? Yes, but so is selling too much ahead or not making any sales as prices rally. You need to have a plan and work it.
The frustrated Illinois customer was able to buy January $6.40 calls before the last leg of the rally started and added 60¢/bu. onto his selling price. His soybean farming was profitable and he's changing how he'll sell his soybean crop in future years.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: aginvestor@agmotion.com.
If this year's major rally in soybean prices is creating frustration — and not joy — here are some suggestions.
Sell in increments. We suggest making 5-10 sales of 10-20%. It's easier to scale up and come in with a better average.
Never sell 100% of your anticipated crop prior to harvest using forward contracts. With aphids and Asian rust — and commodities prices in general trending higher — selling 100% of your crop ahead creates additional risk, rather than reducing risk.
Use all of the marketing tools available. I see nothing wrong starting with forward contracts on the first 20-40% of the crop. We then suggest making the next sales using hedges and the final sales by using put options to create a minimum price.
If you don't understand how hedging and put options work, attend some seminars this winter and get geared up on all the new marketing tools. Odds are good we'll see volatile soybean markets for the next several years.