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Corn+Soybean Digest

Bullish On Beans?

With the wild run-up in corn markets recently, not too many have been excited about soybean prices. But Walt Traudt is optimistic about beans, at least in late 2007-08 and beyond, and is prepared to make early sales when they catch the wave upward.

Traudt grows corn, soybeans and wheat outside Clay Center, NE. He uses sophisticated marketing strategies when opportunities arise to make some solid sales.

An early marketer at heart, he got at least a third of his '07 crop marketed with $6.50 futures early last year ('06). He still managed to get all of his '06 crop marketed at above $6.20.

“I think soybeans will make a run in the next couple of years,” says Traudt, who farmed with his father-in-law, Steve Yost, until 2001, when he started his own operation. “A lot of it depends on the expansion of ethanol production and more corn acres nationwide and abroad.”

If the massive expansion of ethanol continues, he sees a squeeze on soybean production that should benefit prices.

Bob Wisner, Iowa State University grain marketing specialist, says there are reasons to think positively about soybean prices.

He says that even though the important October 2006 crop report pegged soybean production up 3% from the previous month, the 96-million bushel increase was 25 million bushels below the forecasts by the grain trade. Also, Wisner says there was only a modest 66-million bushel increase projected by USDA in South American soybean production.

Wisner notes that following the Dec. 11 USDA report, results of a 2007 acreage survey by a leading private market forecasting firm showed a 6.8% decline in 2007 soybean plantings and a 9.4% potential increase in 2007 U.S. corn planted acreage.

“A sharp increase in corn plantings this spring is likely to reduce soybeans acres, and that may set the stage for reduced soybean carryover stocks in 2007 and '08,” says Wisner.

“These prospects and uncertainty about the South American crop prospects this winter and next spring appear likely to strengthen soybean prices in the months ahead. The large bean carryover stocks will probably temper the price strength some, but bean prices will still have the potential to respond strongly to any serious crop concerns in Brazil or Argentina.”

For Traudt, soybean, corn and wheat marketing are chores he trusts to a marketing service. He decided to go that route in '01 when he was primarily on his own. “There were some run-ups in the markets,” he says. “I decided to take the anxiety out of the marketing end of my farm and go with a marketing service.”

The basic marketing program involved protecting grain prices “going forward,” he says. He sold futures, then used call options to protect those positions.

Like most growers, his '06 soybeans have not garnered the price strength he would like to have seen. But he was safe with the strategies he locked into place early.

“About half of my '06 beans were covered with $6.25-6.30/bu. November '06 futures,” says Traudt. “Those positions were put on in early spring during a small rally. The remainder of my '06 beans was protected by $6.20 November put options to provide a floor price.”

Both the futures contracts and puts provided small if any additional profits for his soybeans, when a local basis of about minus 50¢ was figured in. However, with plenty of on-farm storage, he was expected to add call options to take advantage of higher prices that could result from fewer soybean acres and tighter stocks in '07.

He feels $6.50 soybean futures for the '07 crop was a good start for his early marketing. “I put on those futures because prices in that range looked pretty good in early '06,” says Traudt. “That is on about a third of my crop, which will be a double-crop with wheat (which was offering strong prices in late '06).”

He points out that the $6.50 futures will probably be rolled to a higher level if the market allows it, or call options will be bought to leave the upside open.

“Soybeans have been in kind of a ‘no man's land,'” says Traudt. “There is no or very little LDP and no good market. That's where options can help. They are just an insurance policy on your price.”

Wisner says growers should be patient about marketing '07 or '08 soybeans but should watch prices closely this winter and early spring.

“Logic is that bean prices are still pretty low and it will take a large increase in corn acreage to supply ethanol,” he says. “A lot of those acres will come from soybeans.

“So at this point, take it slowly in marketing, especially with the '08 crop. I expect some price increases by spring, but it could take 12-18 months to see big increases,” Wisner adds. “I'd go slowly unless we get a strong rally in soybean prices. Then it might be time to look at some options.”

He says the high-$6 range to $7 or higher would be a good place to get serious about '07 beans. In late October '06, September and November '07 futures were about $6.50. The cost of a put option was about 48¢/bu., too high for most to use as a price protection tool. “Puts will probably be less expensive later in the market year,” says Wisner.

He adds that selling futures, then buying call options is another strategy to lock in a price and still be open to the upside. Another would be using a “fence,” in which you buy puts, then sell calls at a higher strike price to lower the cost of price protection.

For example, if the November '07 $6.50 put cost 48¢, and a $7.50 call could be sold for 28¢, that puts the price of the $6.50 floor price at 20¢. And the grower could enjoy added profits when the price increased up to the $7.50 level, less brokerage commission charges.

“Growers should see how a particular price level fits their farm,” says Wisner, noting that there is little chance for growers to receive an LDP or counter-cyclical payment from the government farm program.

As Traudt says, that's “no man's land,” one that will require growers to become better marketers, whether they do it on their own or rely on a marketing service.

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