soybeans

Focus on risk management, not price forecast for soybeans

Soybean prices continue to rally as geopolitical tensions in Brazil continue to heat up. Fundamental bulls are hoping to see the USDA lower their ending stock estimate on a slight improvement in demand.

Soymeal prices are at their highest levels of the year and new-crop soybean prices are trading at levels not seen since late last-summer. Our patience has paid off handsomely and I've finally stepped in and started making some new-crop cash soybean sales on this latest push higher.

It seems like we've had to wait an eternity for prices to get back above break-even levels. Now that we are finally here I want to make certain I pay close attention and work diligently towards reducing longer-term risk. Fundamentally the recent rally remains somewhat of a head-scratcher, while technically the charts have become much more bullish.

As I mentioned several weeks ago, the area on the charts between $9.20 and $9.50 vs. the NOV16 contract would be extremely strange and volatile. I suspect if prices can somehow move north of this area there's a strong chance the bulls will quickly target the previous highs up near $9.85 per bushel. Because of the extreme uncertainty at our current level I like the thought of taking some chips off the table and reducing longer-term risk. I've heard  producers making cash sales, some simply buying at-the-money-puts, and others buying puts and selling calls to finance the position i.e. buying $9 puts and selling $10 calls at even-money to finance the floor.

Regardless of your personal strategy, you need to be talking to your individual advisor about ways you can lock in a profit or secure a floor to reduce some portion of your new-crop 2016 production risk.

The bulls continue to talk about the palm oil story and the fact the Brazilian currency has rallied against the dollar to levels not seen since last-summer. The bears believe longer-term the world could be swimming in soy supply, especially if the U.S. producer switch to more soybean acres on the recent rally in price and uncertain corn planting weather.

As a producer, you have to make certain you don't get caught up trying to forecast price and instead focus on managing risk. Remember, these are two completely different concepts and often produce extremely different results.

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