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How early should you promise delivery?

Many of the same soybean growers who were caught by surprise last fall when prices shot skyward are hedging their bets this year by entering into some of the very favorable pricing contracts being offered for early delivery soybeans.

Growers who sold their beans last July and August for $5.50 per bushel and then saw prices jump significantly in the following months, have been signing up in droves for basis contracts and futures pricing contracts guaranteeing a profitable selling price for their 2004 crop.

Will Weathers, manager of Bunge's grain elevator in Greenville, Miss., says he is currently offering a forward control worth $8.10 per bushel for August delivery soybeans. Some Delta growers are also taking advantage of basis contracts worth as much as $1 over the November futures price for August delivery.

Weathers says he expects similar pricing contracts will be available to growers throughout the rest of the growing season, and maybe even into harvest. “The market will dictate the penalty for delivery after Sept. 1 on these early delivery contracts” he says.

That, says Mississippi soybean specialist Alan Blaine, is one of the potential downsides to guaranteeing an early delivery for a crop that's not yet even in the ground. Blaine is concerned that many growers are planting maturity Group 3 and early Group 4 soybean varieties for the first time, in order to take advantage of early delivery pricing contracts.

“This is predominately a dryland system,” Blaine says. “You can make August delivery with Group 3 and early Group 4 soybeans on irrigated ground, but it is not as absolute as dryland. In addition, soil type and planting date both play a major role, a factor I feel many growers have not considered.

In general, the earlier the planting date, the earlier the crop will be ready for harvest. Management decisions will have to be made earlier in the season, with early-planted soybeans likely needing irrigation in early June, and at least one stink bug treatment. “Provide inputs based on the stage of the crop, not the calendar,” he says (see related story, Page 20).

There may be a few more bumps in the road for those growers who jump on the August delivery bandwagon, according to economist Darren Hudson.

Hudson, an agricultural economist at Mississippi State University in Starkville, Miss., reminds growers, “If you book it you've got to deliver it, so how much you're willing to book depends on your tolerance for risk, and certainty about expected production levels. While booking early may make you feel better about your price, you still have to produce a crop.”

This early in the game, his advice is to book one-third of your crop before planting, one-third at crop emergence, and one-third late in the growing season, but he says that is just a simple rule of thumb.

The value of the early delivery contracts currently being offered to growers depends on which way the futures market moves. “If you've got a per-bushel price fixed with a forward pricing contract, you might be upset if futures prices substantially increase,” he says. “On the other hand, with a basis contract there is a risk of declining value if futures prices decline.”

With forward pricing, he says, your risks include delivery time and crop quality. “If you can effectively manage delivery time and crop quality, forward pricing allows a producer to get a better handle on potential revenues and make better management decisions. However, if you shoot for an early delivery window, you may be pushing it too much.”

“If you don't deliver in August, the pricing contract penalties have the potential of being quite severe. Currently, there is as much as a $1.50 per bushel difference between August and November futures,” says Hudson.

A basis contract, he says, doesn't give you a solid price to base your production decisions on, but it can provide growers with more flexibility if the market moves favorably, increasing the opportunities to capture gains. “If prices run up, you get to enjoy the ride up. But the flip side also applies. If prices go down, you could end up riding all the way to the bottom with the market,” Hudson says.


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