Setting basis on 2021 beans and final futures sales

By Jon Scheve, Superior Feed Ingredients, LLC

Predictions indicate South America’s bean crop will likely be smaller than earlier estimates had suggested. However, at this point how much smaller is anyone’s guess, so projections are wide-ranging. If production is at the lower range, there is substantial upside potential still in the market. On the other hand, if production is only mildly affected, then the market has probably traded beyond what is warranted.

Either way, most traders believe that South America will not be producing a record crop this year, which should keep the market from trading to the lows of sub $12 from only two months ago.

For our farm operation, we typically store all our beans in on-farm storage because the nearest processor is too far away for us to haul to during harvest. Plus, nearby local elevator bids tend to be much lower than the processor’s bid most of the year, even when accounting for the additional freight to haul the longer distance.

On Nov. 10 I set the basis for 100% of my 2021 bean crop at +.05 against the January futures contract picked up on our farm. This price exceeded the best posted price available near me at the time, and since making the trade. The chart below shows my basis sale compared to the next two best posted basis bids I could find near my farm from September until today. All prices have the freight to each location accounted for so that bids are compared equally. 

Since I made the trade nearly 12 weeks ago, basis has slipped back 40 cents, so I am very happy with this outcome. However, making the decision in early November to set basis and ship grain in December was not easy. We had just finished harvesting beans only one month prior, and basis levels jumped 20 cents in the 2 weeks before I made the trade. With the futures market having just traded down to $11.80 the day before, there was real concern prices could go even lower if South America’s weather was normal. However, at the time there was also a belief that farmers would not sell at lower values, and the only way end users could acquire enough beans from farmers was to increase basis bids even further. 

I also reviewed the interest cost to keep my beans in storage waiting for better basis bids in the coming months to see if waiting was financially justified. I used a $12 bean value and the 4% interest on my operating note to calculate that it cost me 4 cents per month to hold the cash beans in the bin waiting for better basis values. This cost was too high for me and helped me justify pulling the trigger on the basis sale.

With the 40-cent basis drop since I made this trade, and the 4 cents per month savings in interest costs, I am glad I made the decision I did to set basis and stop paying interest on my beans.

Final futures sales on my 2021 production

I had hoped to be done with futures sales by Christmas, because after December any significant rainfall in Brazil could increase their crop production potential and push values back below $12. Therefore, on my remaining 75% of unsold beans, I had orders in place to be a scale up seller through December on the January contract for my basis sale above at $12.70, $12.90, and $13.

I managed to hit my futures sale goals, but obviously knowing what I know now, I wish I had waited a little longer to set the futures price. It is just impossible to predict weather beyond a week or two into the future. However, it does feel good to get the best basis bid for the year so far. Plus, I still have the 2022 bean crop to market, which is benefiting from the recent futures rally. 

These transactions complete my 2021 bean crop marketing.

Please email with any questions or to learn more. 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.

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