Soybean marketing action

Old crop soybeans remain inverted (meaning they are valued higher in the nearby futures compared to future futures months). Translation — the markets want soybeans now, not later. Additionally, as futures drop, basis levels have been increasing (likely driven by domestic soybean meal demand).  Some think this was caused by the USDA over-estimating last year’s carryout. If true, this could lead to a drop in the carryout this coming year, which would change next year’s balance sheet. This may be bullish news.

On the other hand, South American meal values are dropping and considering the spread difference, imports to the U.S. would be likely.  Plus, China is buying more fall shipments from South America than the U.S. recently. Long term this is bearish.

Also, the market is having trouble estimating the yield potential, because planted acres are still uncertain. Reports indicate farmers in southern Missouri and Illinois were still planting this week. There are three more weeks of unknowns until the next USDA report, which will release updated surveys of several states.

Unlike corn, soybean planted acres are more evenly distributed across the growing area. Iowa and Illinois represent nearly 25% of total soybean acres, but 50% of soybeans are produced equally in the next eight largest states.

So, where will soybean futures go? The most bearish predictions show as low as $8 and the most bullish predictions are $13. More conservative ranges are $9 to $11. Volatility will remain until harvest.

As always bean prices are subject to: final U.S. planted/harvested acres numbers; U.S. yields; the dollar’s value to other world currencies; China’s economy; and South American weather this fall.

Market action

All of this soybean market uncertainty made me rethink my current position this week. As I have shared previously, I’m currently 100% hedged at $11.15 Nov futures. I have thought for a while that futures have been overvalued and $9 per bushel is possible if not likely. However, with heavy rain across the Midwest, I’m reevaluating and taking a cautious approach to my position. After running several scenarios and potential outcomes I am more than ever uncertain where soybean futures could go.

So, last week when Nov futures were near $10, I bought $10.20 call for 35 cents on 50% of the beans I will produce this year.

What does this mean?

On Oct. 23^:

• If Nov beans are above $10.20 I have the right to purchase beans for $10.20.

• If Nov beans are below $10.20 then I will lose out on the 35 cents I spent to own the call.

In other words, if beans are over $10.55 in Nov I can sell the call for a profit.  If not, I lose part or all of my 35 cents.

Speculating or hedging?

To be clear, this trade is speculative in nature. I’m a producer of soybeans, which means I need to sell soybeans (not buy). This trade allows me to buy soybeans if I wish, which isn’t something I need to do for my operation. Thus this trade is speculative, but hear me out.

Why would I put this trade on?

Because I’m not sure where prices are going to go and big surprises could be likely down the road. I want to be able to capitalize on these potential surprises. This trade has limited downside and helps me reduce regret. I think there is a good chance futures could rally $1 to $2. I’m willing to risk 35 cents to capitalize on that potential opportunity. Plus, I continue to keep my sales for my beans in place and thus have no further downside risk. Ultimately, it gives me piece of mind knowing I have a price floor and upside potential.

Make no mistake though — this trade is inherently speculative. Some futures brokers would say this is “trading the market.” Others would say this is a great way to try and make additional money. Both statements are correct. Typically I’m a strong advocate for never speculating with the farm operation. However, there are occasional exceptions, like in this case where there is limited risk. As long as farmers completely understand the risks and potential regarding these types of trades, they can provide another potential opportunity to farmers, especially considering the constant uncertainty of the market.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.