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Cautious with beans

Agriculture.com Staff 02/11/2016 @ 2:44am

Many soybean producers we have recently talked to believe bean prices will hold or move higher due to the long-term demand.

While they may have a point, we want to remind farmers that both the US and world hold record bean inventories. With South America producing what will likely be a record crop this year, prices could move lower.

As of this writing, we are not convinced there will be a large switch from corn acres to soybeans due to wet weather. That may occur in another ten to fifteen days, but if corn planting goes well the first week of May, it is unlikely there will be a major shift. Therefore, we cannot currently argue the rationale to be bearish beans on acreage switch.

However, excess inventory with carryout close to a record 600 million bushels, we do not see much reason why end users will chase the bean market. Therefore, while beans may be a follower of corn and/or wheat if these commodities move higher, it is also just as likely that traders may concentrate on buying corn or wheat and selling beans.

What to do? If you are holding old crop inventory, we encourage you to sell due to the cost and risk associated with storage. If you want to retain ownership, consider buying September or November bull CALL spreads. This strategy consists of buying a low strike price CALL option and selling an out-of-the-money strike price call. The goal is to put yourself long the market for commercial storage cost or less with a quantified risk.

As an example, one could re-own beans using September options by purchasing a September $7.80 soybean CALL for 35 cents while selling an $8.80 CALL for 13 cents. The net cost to you in this example is 22 cents plus commission. This is your maximum risk as a spread. Potential gain is limited to the difference between strike prices less cost. If prices drop, you stand to lose what you invested in the bull CALL strategy, but you will look back and feel good about having sold beans.

If you have any questions or comments, please contact Top Farmer at 1-800-TOP-FARM, ext. 129.

Many soybean producers we have recently talked to believe bean prices will hold or move higher due to the long-term demand.

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