Are the fundamentals surrounding soybeans causing prices to surpass expectations? At least one Corn Belt grain marketing specialist thinks so. And it could be a signal for you to sell more beans this spring. Price volatility can take the life out of a market in a flash.
New-crop soybean futures have bumped the $13/bu. or higher range since March 1. That’s more than $1 higher than what’s projected as the year’s average price by USDA and Jim Hilker, Michigan State University Extension economist. “It’s way over most growers’ cost of production if they have a decent soybean yield,” he says. “They probably should consider getting get some sold.”
Pete Story is among those who have increased sales. He upped his soybean sales to over 50% of his planned 2,000 acres of bean production. The Wolf Island, MO, grower remains “cautiously bullish” about bean prices and production.
His river location also provides a strong market for non-GMO soybeans, which account for at least 80% of his production. He locked in a $1.40/bu. premium (over futures) for them.
Yields average about 55 bu./acre for irrigated and 35 bu. for dryland. He marketed about 20% of his projected 2012 crop last December at about $11.90 futures. “It was a very profitable sale based on his projected cost of production and yield forecast,” he says.
November 2012 soybean futures started the year at $12.30 but dropped to $11.70 by mid-January. Starting in mid-February, they increased from about $12 to past $12.40 the first week of the month, past $12.60 the second week, about $12.80 the third to about $12.95 by March 1.
With those steady climbs, it didn’t take long for Story to start fanning the trigger on soybean sales. Working through a marketing consultant, he forward contracted another 15% of his expected production with a regional elevator at $12.50 in mid-February. More forward contracts at about $12.75 were made in late February. A cash sale was made at the beginning of March for $13.
“That put us at about 55% sold,” Story says, adding that futures at $13.50 is his next big target. “That price would break some more loose for sure.”
These added sales would either be through forward contracts, or put options, says his consultant, Deena Glenn, Charleston, MO. “With the put options, he’ll be covered if the market falls out of bed and will still have upside potential if the market should rally through the unsold cash bushels,” she says.
“He’s also not locked into having to deliver production if there are problems during the growing season.”
USDA and private sector forecasters have projected soybean plantings at about 75 million acres, virtually unchanged from 2011. Even with the rise to $13, soybean prices are below prices seen last spring. USDA’s season-average farm price for soybeans is projected at about $11.50, down from the $11.70 mid-point of the 2011-2012 projected range.
Hilker had also projected an $11.50 price range. He feels the dry South American weather helped create the surge in prices to near $13. But he won’t guarantee they will stay.
“There’s still tons of risk around that price,” he says. “The price volatility can cause markets to jump two or three bucks. By the time we get to November, there’s at least a 10% chance we’ll see $14-15. And there’s a 10% chance we could see $10.
“Maybe we need to at least get enough production sold to cover a portion of the variable costs.”
Hilker encourages growers to watch their basis and consider using straight hedges or hedge-to-arrive (HTA) contracts to get a portion of their beans marketed. “A lot of Corn Belt elevators are offering HTAs,” he says. “With the HTA, you can lock in a futures price now, then lock in your basis later on when it strengthens. Then, you have a complete forward contract.”
Of course, basis varies from region to region. In can be 65¢ under (futures) in Michigan and 45¢ under in northern Ohio, or 20¢ under in southern Iowa and 70¢ under in northern Iowa. “Our new-crop basis is about 65¢ under (in southern Michigan) and maybe 55¢ under at the larger elevators,” Hilker says. “They could narrow later in the year when supplies shrink.”
He adds that if prices continue with an upward trend, growers should beware a break. In 2011, for example, November 2012 soybeans peaked in early September at about $14. By Oct. 1, they had plunged to $11.80. They were $11.20 about Dec. 1
“When a market is racing up and you haven’t yet priced grain, put a stop under it to prevent a big lost opportunity,” Hilker says. That can include having a futures pricing order when a price hits a set level, or instructing the grain buyer to purchase a portion of the beans at a particular price level if the market starts down.
While Story may use some put options to set a floor on some soybeans, Hilker is not real high on options other than for perhaps short term use.“Options are expensive,” he says. “If you like the price being offered in a forward contract – take it.”
Hilker says growers may consider using options spreads to lower the cost of price protection. But there may still be substantial cost involved of at least 40-50¢/bu., he says.
He adds that the amount of risk a grower is willing to take in marketing may depend on the amount of revenue protection insurance he carries through the USDA Risk Management Agency.
Story carries little if any RMA protection insurance because of his location near the river. That’s the flip side of the price-premium advantage he sees for growing non-biotech beans.
“I try to not cash sale over 85% of my crop up to harvest due to production risk. If prices go up and you have the production, you can take advantage of them, but if you don’t have production and you have everything sold, you’re in a sling.”
RMA Floor Prices
The February bump in bean prices helped set a projected price of $12.55/bu. for growers signed up for government crop insurance. Bruce Sherrick, University of Illinois professor of agricultural economics, says the price offers a starting point for growers looking to get more acres marketed leading into the summer and harvest.
The USDA Risk Management Agency (RMA) soybean projected price is determined by averaging the closing November futures prices during February trading days. The corn projected price, $5.68/bu., is determined by averaging the December futures closing prices in February. March 15 was the deadline for getting signed up for revenue protection and other crop insurance.
“Crop insurance continues to be an important part of a growers overall risk management,” Sherrick says. “For example, about 80% of Illinois acres are enrolled. Having crop insurance enables growers to feel more comfortable in forward pricing a larger percentage of their crops.”
Even though the prices determine the guarantee revenue indexes for RMA revenue protection programs, they don’t reflect local basis, Sherrick says. He adds that “the soybean volatility factor is .18,” which directly influences crop insurance premiums.
For 2011, RMA prices and volatility factors were $13.49 and 23¢ for beans and $6.01 and 29¢ for corn. Sherrick says the lower priced volatility helped keep crop insurance costs at levels comparable to 2011. For more go to http://bit.ly/ylO8dh.