Protect soybean profits for 2017

It was another week of relatively boring, range-bound markets. With the holidays approaching it seems like the trend will continue.

Since harvest I’ve been presenting Grain Marketing Workshops to farmers throughout the Midwest. During these meetings, I’ve had the chance to talk to many farmers about future plans. Many farmers have indicated they will plant more beans in 2017, since beans currently are above $10 and corn is under $4. Obviously this is anecdotal information. We won’t receive confirmation on this until the March 31 USDA report.

If this does happen, corn may have more upside potential several months from now, maybe even $4 by summer. For the time-being though (the next 100 days) I expect unexciting trading in the corn market.

Dry weather concerns in Argentina are keeping prices firmly above $10. However, the Brazil harvest is expected to be a record and the problems of last year are unlikely. The market is weighing these issues along with uncertain demand from China.

As mentioned above, I think a lot of farmers will switch corn acres to beans in 2017. I also don’t think the market has this change built into prices yet. Therefore, I want to cover and protect my last 25% of 2017 crop.

 

The trade

With beans around $10.15, I purchased a Nov $10 put for 55 cents and sold a Nov $11 call for 35 cents (20-cent net cost).

 

What does this mean?

If at the end of October beans are trading:

  • Below $10 — I have $10 floor price (less the 20 cents) – $9.80
  • Above $11 — I have $11 maximum or ceiling price (less 20 cents) – $10.80
  • Between $10 to $11 — I can set my price wherever the market is (less 20 cents)

Before this trade I was 75% priced at an average of $9.73. Now, I’m 100% priced with a guaranteed $9.75 floor and an opportunity to hit a $10 average (if prices are $11+ next fall).

Obviously I don’t know where bean prices will ultimately go, but I know at the prices above I am well above my cost of production. Today I am more worried about bean prices falling and being forced to take less than current levels and less concerned about missing upside potential. As always, my goal is to have a profitable farm operation, and at these prices I have guaranteed that.

 

Understanding and accepting bean volatility

Last week I was in a meeting with a global grain trading company and farmers discussing why the bean market was so strong. The farmers were concerned with such high prices despite so many bearish fundamentals in the market. This confusion over irrational market behavior was causing many farmers to hold when they should consider selling. Nearly all of the farmers in the room still had unpriced 2016 beans and most had nothing sold yet for 2017.

Often farmers can suffer from a case of “analysis paralysis,” scrutinizing all the data and details to make sense of the market. They hope with all this analysis they will be able to sell at the top of the market, making the biggest profit possible. The thing is, farmers aren’t traders or speculators (who are also analyzing enormous amounts of data), so they need to think differently. Farmers are producers who will always have more product to sell. And to continue to be a farmer, they need to ideally sell at a profit every year.

The problem with beans is that they are usually much more volatile than corn. There are many reasons for this, but one of the biggest reasons is that South America produces over 50% of the world’s beans while the U.S. produces only about 33%. The two harvests are only six months apart. Honestly, farmers should really just focus on not losing money on beans every year, rather than trying to hit the top of the market.

Following is an example for why worrying about hitting the top of the bean market is not necessary. I plan to produce 20,000 bean bushels in 2017. If beans were to rally $3 next year I could miss out on $60,000 being 100% priced today. While this would be unfortunate, it’s important to realize that if beans rally, corn would most likely ALSO rally — probably $.50-$1 per bushel in a $3 bean rally scenario. Since I will produce 130,000 corn bushels in 2017, this would mean $65,000 to $130,000 in corn profit. So, I’m still ahead if a bean rally happens, I would just take advantage of it with corn instead. Plus the opportunity is so much bigger with corn. Also I’m expecting the odds of beans being over $10 next year to be low.

Rather than trying to rationalize bean market volatility so you can sell at the top of the bean market, focus on just taking profits on all of your beans consistently every year. Waiting too long may mean missed opportunities.

 

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.

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