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Be Ready For Soybean Price Volatility, Analyst Warns
Soybean futures have been on a roll.
Following the January 12 Supply and Demand report, beans found a near-term bottom, posted a bullish key reversal, and have been rallying for the last month. Support comes from a weaker dollar, lack of farmer selling, and now weather uncertainty in the Southern Hemisphere. Soybean meal has led the complex higher, with sharp gains of more than $60.00 a ton since mid-January. Dry crop conditions in Argentina, the world’s largest soymeal exporter, have both end users and speculators buying.
There are always a lot of moving parts in the bean complex, and the loudest right now is the weather uncertainty in Argentina. However, the backdrop to recent price strength is demand, which continues to surface at a record pace. Weather issues could quickly send soybean prices up to the next level of longer-term resistance at $12.00, or send futures sharply lower. With Brazil's crop in (what appears to be) mostly very good shape, analysts are beginning to raise expectations for a record supply from that country. The most recent USDA Supply and Demand report indicates little to no net change expected in South America. Brazil gained an estimated 2 million metric tons of crop production, while Argentina lost the same amount through the end of February.
Unless weather factors decidedly take hold soon, the zero net change in South American production could be negative for prices. If adverse weather continues, the rally is just beginning. What about other factors? U.S. soybean acreage could be up another million, an increase of over 5 million acres since 2016. Good weather in the U.S., along with South American production, could suggest a decline in bean prices to $8.50. A move beyond either the $12.00 or $8.50 would be considered extreme. However, keep in mind that prices spent a number of years in the not-so-distant past trading above $12.00. In the end, we're discussing the effects of volatility. The likelihood of prices staying where they currently are, between $10.35 and $10.55, is not high.
To prepare for volatility, consider a balanced approach. Reward this most recent rally with cash sales of old crop, and make forward sales (or some type of hedging) for new crop. Consider purchasing put options on a portion of your expected production. The key is to have enough beans either sold or protected against lower prices. Then, if prices take a nosedive, you have sold/defended enough to make a difference, should a low price environment occur. Should prices rally, retain ownership of forward sales by purchasing out-of-the-money call options. Consider puts and the use of short-dated options that have a shorter time window, and therefore, less out-of-pocket cost. The key is that you're not caught off guard by selling too many beans, and not having enough sold. Volatility can be embraced and managed.
If you have questions or comments, contact Top Farmer at 1-800-TOPFARM, ext. 129.
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