Bullish soybeans in August?
Typically, as the end of July approaches, the price for soybeans is under pressure.
In most years, weather is good enough that, if there’s enough projected rain to fill pods, traders and end users tend to stand on the sidelines. The soybean plant is resilient. If timely rains occur, yield potential increases.
This year, the USDA is looking for an improvement in yield at 51 bushels per acre vs. last year’s 50.2. Historically, this is a robust number and anticipates that better genetics, farming practices, and weather will provide for bountiful yields. Much of the Midwest is on track for this type of yield, or even better. Yet, much of the Midwest is not. Since August is such an important month for soybeans weather-wise, the potential for bean prices to rally is substantial. Weekly crop ratings released each Monday by the USDA indicates 58% of the crop is rated as good or excellent as of this past Sunday. This compares with 72% a year ago for the same week.
The focus for price direction the next several weeks is in two areas. One is U.S. production, and the other is Canadian canola production. The northwestern regions of the Midwest and key growing areas for canola in Canada have continued to struggle with hot and dry conditions. Private estimates have the potential for Canada to import 2 million metric tons of soybeans, or about 75 million bushels, to make up for canola production losses. Continued concerns regarding U.S. production, coupled with historically tight supply figures, and the recipe is in place for a strong price rally if less-than-ideal weather unfolds in the weeks ahead. There are private forecasters suggesting that a ridge of high pressure will continue to dominate the Northwest and edge eastward, which could mean limited rainfall for key growing areas. Ultimately, this could put a strain on the current USDA production estimate and may likely imply that the market needs to ration inventory. Rationing is accomplished through price appreciation.
As a producer, you have the balancing act between making cash sales on a crop that may look good vs., say, doing nothing to see if the bullish argument has merit. The problem with doing nothing is that this takes on significant risk. By many accounts, this is the most extreme marketing strategy, as you either benefit greatly or pay dearly, should prices fall. Projected tight carryout is already factored into the current price, with November soybeans hovering near the $13.50 mark. This is historically a high price. Yet, even a 1-bushel loss in yield, assuming no demand change, could cause projected carryout to drop well under 100 million bushels. Basically, the supply pipeline will be empty by the end of next summer.
Bottom line: Supplies are historically low. Consider a strategic approach. Either purchase put options using the November contract to establish a price floor, or if confident your production will be there, make cash sales and retain ownership using call options or bull-call spreads out to January or March. Either way, you are ready for whatever the market dishes out. Good marketing is often accomplished with multiple marketing tools that ultimately allow you to shift risk and manage opportunities for all your expected production. Talk to a trusted adviser to develop a strategy that will work best for your operation.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-334-9779, extension 300.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.