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Rare opportunity in the beans - Roy Smith

In looking at the soybean futures markets, a condition that rarely happens has developed. November and January soybean futures are higher than the deferred May and July futures. Under normal conditions, a premium is added to the price level of deferred contracts for the cost of storage and interest for owning the beans for those months. This year the situation is reversed. Buyers of soybeans for processing are signaling that they will pay a premium to source the beans now, not next spring and summer.

As of Friday’s close, January futures were at a premium to July futures of 95 cents. While that spread is less than it was in September, it is still extreme. The last time there was a similar situation was in the 2003-2003 marketing year. The soybean crop was cut short by weather problems as it was in 2012. Prices were in an uptrend since August.

On November 1, November futures traded around $8.00 per bushel. At the time it seemed extremely high because they began the move from around $5.25. May 2004 soybeans traded at roughly a 50 cent discount to the November 2003 contract.

The market was screaming for cash beans to be delivered then, not held until the following spring. What we did not understand in 2004 was that the big inverse was telling us that prices would be higher when the supply of cash beans got used up. By the March-to-May time period, May soybean futures made a double top in the $10.50 area. In November the market action was predicting a $3 rally in soybean futures. If only we would have understood what it was saying.

There is no way of knowing whether a similar move will happen this year. The fundamentals are in place, however, similar to the way they were in 2003-2004. Besides holding soybeans in storage, there are ways to take advantage of this unusual situation. This is one time when selling cash beans and buying a call option has odds of working well. Selling beans now with futures at $15.60 and buying a July $14.80 call option eliminates the risk and cost of ownership and results in being exposed to price appreciation without the risk.

This strategy worked very well in 2004. If prices continue to rally as the spreads indicate they probably will, selling cash and owning the call option will be more profitable than owning the beans.     

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