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Corn+Soybean Digest

Managing A Wacky Bean Market

Up 30¢ one day. Down 25¢ the next. Up 8¢. Down 15¢. Volatility rules in the soybean market. The weekly, and even daily, market charts resemble sketches of a new Six Flags roller coaster.

“Our growers sold some soybeans at $7/bu. and they sold some for $10,” says Trenton, MO, grain handler Phil Hoffman. That was for both the 2003 crop and this year's crop.

For grower George Gates of Bethany, MO, getting soybeans sold at $7 cash or above can't be a bad thing. He will likely pull the trigger on beans at that price or higher levels when he can.

Gates, who delivers beans to Hoffman's elevator and other markets, was like many growers in early summer. He worried whether he could get all of his crops planted or replanted, as daily thunderstorms were often the norm in north central Missouri.

Forward contracting beans he could guarantee delivery on was a tight fit.

“While we usually have an average yield in the mid-40s (bu./acre), we had many beans at 17 bu. in 2003 because of dry weather,” says Gates. Getting the '04 crop planted meant dodging excessive rain. It wasn't completed until mid-June. Still, Gates and his brother Jim managed to get some of their crop sold early due to late spring market rallies.

“We sold some soybeans in the $7.30 range and some at $7.40,” says Gates. “We'll probably contract more at the $7 level when we can.”

Picking when to sell new-crop beans was difficult. The November '04 soybean futures contract was about $6/bu. at the start of the year before climbing to $8 by April.

Before May 1, the price dipped to just above $7 again, before topping $7.90 once more. Then sub-$6.60 levels were seen by mid-June before futures prices pushed $7 only 10 days later.

There was still talk of $8 new-crop beans in early summer. Who knows? Where do you pull the trigger with those massive swings?

Purdue University agricultural economists Corinne Alexander and Chris Hurt say that if prices are in the $6.50-7 range in late summer, growers should consider pricing some of their crop not already sold.

“We've had two short crop years in a row,” says Alexander. “If there's a really good crop this year, prices are probably going down. We could go as low at $5.50. If you can make money with $7 beans, I suggest selling. You may want to hold back some beans because it could go back to $8 (if world situations change).”

The soybean basis is in the 30-50¢-under futures level in the Trenton-Bethany, MO, region. It's often at its strongest late in the year.

“Our basis is at its best level between harvest and Christmas,” says Gates. “So we'll probably follow much of our normal strategy of attempting to sell much of the crop before the first of the year.”

He did hold back some '03 beans and took advantage of the high price jumps in the spring. Many growers did the same thing and found that marketing '04 beans early after seeing old-crop beans bring $10/acre or more was difficult. But there were sufficient opportunities to get some new-crop beans contracted well above $7.

Hoffman says a few of his customers took their normal “daily marketing” approach and plan to sell about 75 bu. of beans per day, every business day, to obtain a market average for the year. “That helps them pay bills when they need to and relieves some of the stress,” he says.

For new-crop beans not yet marketed, Purdue's Hurt says that if the crop appears to be normal or higher, then selling any weather rallies in August or early September makes sense.

“Producers should watch closely for early harvest price premiums this year,” he adds. “Soybeans that can be harvested in August could demand $2 premiums. Those delivered by Sept. 10 may be in the $1.50 range, and there might even be 50¢/bu. premiums on Sept. 20.

“This will be dynamic depending upon how short old-crop beans are and when harvest can start for the '04 crop. These premiums can vary sharply by area of the country,” Hurt says. “In addition, those farmers who have forward contracted new-crop delivery beans should not deliver early harvest beans against these contracts when they have the opportunity to get substantial price premiums on the early delivery volumes.”

Hurt believes many growers will hold tightly to soybeans this harvest and be eager to store them. This is a reaction to the '03 crop when they sold $6 cash at harvest and feel like they gave up their opportunity to price at $10.

“If this is correct, prices may actually reach their lows prior to harvest and then see some rally through harvest,” he says. “Once the crop is in the bin, farmers will tend to want much higher prices to move them out. This may cause an unusually strong recovery in prices in the 45-60 days after harvest moving into mid-December.”

Hurt cautions growers about storing beans too long. “Producers should think in terms of 45-60 days of storage and then move the beans out to the elevator by mid-December,” he says. “For those who want to speculate on price, do so with re-ownership of futures or call options.”

Another warning is a spring '05 “fear factor” from the South American crop. “Assuming U.S. farmers store aggressively this fall and that the South American crop approaches the records USDA predicts at this point, then $6.25-6.50 harvest prices could turn into $5.50 prices by February,” says Hurt, whose crop and market outlook newsletter is available at

Hurt says using a put-call spread, or minimum-maximum price position, can be a “pleasing alternative” pricing strategy.

“I generally like to see producers buy a near-the-money put and sell a call about two strikes out of the money,” he says. “In other words, if May '05 futures were at $6.25, you could buy a $6.25 put and sell a $6.75 call.”

Hurt adds, “This provides 100% protection on the downside, with a 50¢ window of price gain on the upside. Of course they give up their chance to make the big money if South American yields hit the skids again in '05. This will depend on individual taste, risk preferences, understanding of the position and their outlook.

“I also like the idea of storing until late November or early December, selling the cash beans and replacing with options,” he says. “Once the cash beans are sold, the min-max pricing strategy would be to buy a near-the-money call and sell a put a couple of strikes out of the money. Most producers will be hesitant to limit their upside gain, however, given the more than $4 rise in prices for the '03 crop.”

He adds, “To leave all of the potential upside price gain in place, they would simply buy calls after they sell their cash soybeans.”

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