A Soybean Strategy to Consider
The recovery in soybean prices this past week from $9.37 to just under $10.00 has been impressive. This rally, somewhat unexpected due to high yield results being reported, has given producers an opportunity to market at a level that was not expected. Strong demand, as well as a lack of beans in the supply pipeline, is being attributed to upward price pressure. Strong export sales in late summer and so far this fall, coupled with big export inspections figures, suggest beans needed to move from field to shipment.
So what should you do with your beans? If you're a farmer and have extra yield, consider it a bonus. Take advantage of the most recent recovery and sell extra soybeans. High yield results suggest there is downside price risk. The current USDA crop yield estimate of 51.4 bushels per acre could be low if our customer feedback is accurate. Most producers we have talked to have record yields in excess of 55 bushels. Once the demand pipeline becomes filled, prices are vulnerable to a drop, as commercials either reduce buying or hedge (sell futures) against purchases from farmers. Our bias is to encourage producers to be light on inventory and strong on paper. Why? Holding inventory subjects you to three risks: basis, storage cost, and market risk.
Selling on the most recent price rally generates cash flow and reduces risk. Reinvest a portion of the proceeds into fixed risk strategies to retain ownership. Consider buying calls or bull call spreads. We suggest moving out to the July options contract so that you’re able to capture the full Southern Hemisphere weather market as well as the early start to the U.S. crop season. July options expire on June 24. If bean futures drop, you have a known risk and what we would term holding power with your option. That means if prices were to drop over the next month (let's say 75¢), you may fall behind on your position. However, since your risk is fixed, you will likely hold this position. If, at some point later, prices rally back (especially due to critical Southern Hemisphere weather or perhaps U.S. weather), you are still in the market and able to take advantage of upward price movement.
Which option or strategy to incorporate should be discussed with your market adviser. Each strategy has its pros and cons. You'll want clear visibility knowing what your position is, what it can do for you, and the risk involved. Both a long call and long bull call spread have fixed risk components. The long call has unlimited profit potential; the bull call spread has a fixed, or limited, profit potential.