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Corn+Soybean Digest

Don't Laugh At $6 Beans

Rod Gangwish hardly ever turns down a profit on his soybeans. But he doesn't tie himself down either.

The central Nebraska soybean and corn grower often uses forward contracts to secure a reasonable soybean price. Call options are then placed to capture upswings in the volatile market.

He used that strategy to lock in a $6.04/bu. average price for soybeans through a local elevator, picked up at the field. And he also used options spreads to leave him open to a price window that tops out at $7.40.

“We have a 50-50 soybean and corn rotation,” says Gangwish. “Most of our corn is seed corn. It performs well following soybeans. Marketing the seed corn is usually easier than marketing the beans.”

Gangwish says creativity is important in any soybean or corn marketing plan. “We usually have three methods of marketing grain; the government program, cash and the creativity involved in using the right combination of options or futures,” he says. “The idea is to make some out of all three areas.”

He doesn't normally market all of his beans early, but 2005 is different. “We had some good cash flow from a good year last year,” he says. “When November '05 futures prices rallied in the spring due to a potential short crop in South America, we decided to contract with the elevator based off those strong prices.”

In mid-March, with futures at the $6.40-6.47 level, he contracted most of his soybeans. The remainder of the crop was contracted in April off $6.35 futures. With a local basis about 40¢ under, he locked in a cash price above $6.

To leave himself open to the upside, he used three separate options trades. He bought $6.60 November calls, sold $7.40 calls and sold $5.40 put options. The higher calls and put sales were made to reduce the cost of the $6.60 calls. The total cost of the price protection was 12¢/bu.

Even though he didn't have a set plan in place, Gangwish was prepared to make soybean sales when he saw profit potential. “If you don't have a plan, something in mind to pull the trigger on, a lot of those good marketing opportunities will be over,” he says. “I know when you make a cash sale it never disappears. And I know we can make money on $6 beans. You just have to be ready to take advantage of those pricing opportunities.”

There weren't many spring opportunities to sell at the $6-plus level for cash beans. But as the summer turned dry in June for many growing areas, prices escalated, with November futures prices easily surpassing $7.

Chris Hurt, Purdue University grain marketing economist, says if that dry trend is still around August, growers could see good pricing opportunities as harvest approaches.

“If there are weather-related price rallies, the general advice is usually to price during those rallies,” he says. “And if the dry period continues up to harvest, then harvest selling should be considered instead of storing beans.”

The reason is that in late June, when January '06 futures were near $7.60, there was a 40¢ drop through the May contract. Hurt says the potential for a large South American soybean crop next year is one reason behind “the cliff following January.”

If growers do sell their remaining '05 beans at harvest and want to remain open to higher prices, then January or March futures or call options may be in order, he says.

In early summer, Gangwish was looking at some '06 cash sales, again with marketing opportunities in the $6 cash range. “If we can make '06 sales in the $6-6.50 range, we have to look at selling some of our crop and using options to protect against price increases,” he says. “We may even look at '07 sales.”

Glenn Johnson, owner of Financial Investor Services, a commodity marketing service in Grand Island, NE, says selling soybeans or corn “one year out” can be advantageous.

“Soybeans might be the only grain where demand may outpace the supply market,” says Johnson. “After farmers determine their breakeven price, they need to look at selling early into a rising market. For '06, they should consider early sales at $6-6.15 in the cash market, then use call options to possibly pick up some extra money in price rallies.”

Al Kluis, president of Northstar Commodity Investors in Minneapolis, MN, says growers have had good opportunities to lock in solid '05 soybean prices. For his customers, he suggested getting unsold new-crop beans marketed when November futures hit $7.58. Some of his clients had $6.60 November puts in place for a strong floor price. But he says they should consider rolling up those puts to a $7.20 or better price.

For '06, Kluis is advising growers to continually watch for opportunities to get some of their crop sold in the $6.40 or higher range.

Early pricing should be a prudent process, he says, noting that the degree of crop insurance a grower has may impact the level and type of price protection they use.

“Producers who have purchased higher levels of crop revenue insurance find it easier to sell ahead as prices rally,” he says. “The revenue insurance reduces the financial risk, if you have a less-than-planned-for harvest.”

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