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Corn+Soybean Digest

How Early is too Early?

As is the case with any business, a grower's first priority is to make a profit and stay in business. How much profit depends on the difference between cost of production and the price received for the commodity produced.

The question then becomes, how early is too early to price future soybean crops?

“A fantastic opportunity is staring us in the face. Why not do something with it? How aggressive you want to get in marketing future crops, however, depends on several factors,” says Mississippi State University Agricultural Economist John Anderson. “It's a very personal decision that is very specific to the individual, but if there is a profit being offered, there's nothing wrong with taking it.”

Among the factors influencing advance marketing decisions are production history and an individual's affinity for risk.

“If I know I've got soil types favorable to soybean production, adequate irrigation capabilities and relatively little production variability from year to year, I can be fairly confident in forward pricing a larger percentage of my production,” Anderson says. “However, if that production variability increases and a complete crop failure is even a possibility, I would be less likely to book in advance or would at least be inclined to book a smaller percentage of expected production.”

THE FURTHER OUT in time you price future crops, the greater the market uncertainty. “It's a question of how risky you perceive your production to be and how comfortable you are in bearing that risk,”he says.

While the price risk associated with uncertainties in the market is the reason some producers may back off from aggressively marketing future crops, it is also what attracts growers to book soybeans well ahead of production.

“Taking that risk off the table may be the prudent thing to do,” says Anderson. “The further out you go, the less production you want to book, but the market is offering a tremendous incentive to grow soybeans. The decision becomes how much you are comfortable pricing.”

Anderson says it is difficult to find a historic precedence to analyze today's soybean market. “It's very tough to compare today's prices to commodity prices of decades ago. We don't carry stocks over anymore, the policy environment is totally different than it was in the 1970s and the world market is totally different than it was in the 1970s. In addition, our input price situation and production systems are totally different.”

What is certain, he says, is that soybean prices — like all commodity prices — are inherently unpredictable. “The reality is that no matter how good an analyst you are, you can't confidently predict commodity prices. Prices respond to information and information enters the market randomly,” says Anderson. “Until you actually have those inputs bought, or at least locked in, you can't determine your profit margin.”

With the expectation that production costs for competing crops will remain high for the foreseeable future, many economists see soybean futures above $11 as a good opportunity to price at least some percentage of future crops. “At this level, the downside risk is much greater than the upside. From an emotional standpoint, you may be able to handle risk well. But from a financial standpoint, how much risk can you withstand? The questions growers should be asking themselves are: What is the market giving me right now, and can I live with it? With current soybean prices, that should be an easy question to answer,” says Anderson.

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