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Should you start selling 2022 soybeans?

For several months, the November 2022 soybean contract has been in a tight trading range of $12.25 to $12.75, currently trading near $12.50. Farmers should consider defending this price. 

For several months, the November 2022 soybean contract has been in a tight trading range of $12.25 to $12.75, currently trading near $12.50. At a glance, it is going nowhere fast. Yet, farmers should consider defending this price. 

There are scenarios unfolding that have us concerned about a significant number of acres traditionally planted to corn, possibly moving to soybeans in the year ahead. Rising inputs costs, in particular fertilizer, could encourage farmers to plant more soybeans. Not only are record fertilizer prices a concern, but we also face the possibility there just won’t be enough to go around. Shipping delays and skyrocketing natural gas prices (a component used in nitrogen production) are also considerations that may make it an easy decision to plant soybeans over corn.

Add to the mix of high fertilizer prices an expectation that the Southern Hemisphere will crank up soybean production. There has been an economic incentive to produce more soybeans. Now, all arrows point to increased acreage in both Brazil and Argentina, as well as satellite countries.

Ultimately, world production and carryout for soybeans could be on the rise in 2022. This past week, the market received more supply information in the form of an increase in quarterly stocks well above expectations, due to an upward adjustment to yield for the 2020 crop. At home, harvest is well underway, and results are suggesting August rains were beneficial. This implies the potential for a small bump to the yield, perhaps to 51 bushels/acres from the current 50.6 figure.  Feedback from producers during the first half of harvest is that many are experiencing better-than-expected yield, compared to expectations just prior to harvest.

We outlined above some of the rationale to suggest that soybean prices in the year ahead could be on the decline, as world inventories could rise. The projected carryout for soybeans can massively change from one year to the next. It was just a little over a year ago when carryout was a billion bushels. By mid-summer of this year, we were close to 100 million. The most recent projected carryout for soybeans is 256 million, according to the September 30 USDA Stocks report. If yield is revised higher and South America harvests a bigger crop, stocks could grow well beyond 300 million and may be as high as 500 million by the end of August 2022 (end of marketing year). This could imply that $12.50 beans for next year may be $10 or less by harvest.

Manage potential risk, opportunity through strategy

As with any scenario, keep in mind it is merely a projection or educated guess. You can manage potential risk and opportunity through strategy.

Consider forward selling or hedge-to-arrive contracts for 2022 soybeans, and then retain ownership by purchasing call options for November 2022. Call options are pricey because you’re buying significant time value. Yet, options serve a function, which is a re-ownership position to buy and provides confidence to make sales. If you wanted to reduce your cash outlay for the call option purchased, you could sell an out-of-the-money call. This strategy is called a bull-call spread. Both risk and profit potential in a bull call spread are considered fixed. You now have a more balanced approach where you have committed cash and have a fixed investment into re-ownership. Make sure you have a thorough discussion with your advisor before implementing strategies.
About the author: 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.

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