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Practical Risk Management

How to get $9.50 soybeans

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How can you turn Nov’20 futures trading today at $9.70/bu. into $9.50 cash price on your farm?

Several years ago, I wrote a column titled “How to get $4 Corn” (see CSD November 2017). It sounded like a trick at the time, as harvest bids were $2.90-$3.00/bu. But it was not a trick – it was a simple combination of pre and post-harvest marketing tactics, and the principles apply to more than just corn. In fact, with Nov’20 soybeans trading near $9.70/bu., I see an opportunity to get $9.50/bu., cash price, for your soybeans by the spring of 2021. The last time you had a shot at $9.50 soybeans was before the start of the trade war.

How can you turn Nov’20 futures trading today at $9.70/bu. into $9.50 cash price on your farm?  Let’s review the three-step process.

Step one: Price soybeans with a sale of Nov’20 futures above $9.70/bu. For two reasons, I think that $9.70/bu. is a great place to start pre-harvest pricing of the 2020 crop. First, since the trade war began, the November contract has spent a lot of time in the range of $8.30-$9.30/bu. $9.70/bu. looks attractive. A second reason is production costs. By my estimate, $9.70/bu. for Nov’20 soybean futures translates into a breakeven cash price or better for most producers in the Upper Midwest.

Assuming a northern Iowa/southern Minnesota harvest basis of 85 cents under the November contract at harvest, your sale of $9.70 soybean futures translates to $$8.85 cash soybean price at harvest in 2020.

Step two: At harvest, place soybeans into storage and roll the hedge forward to the Jul’21 contract at a 50-cent positive carry (the Jul’21 contract trading 50 cents higher than the Nov’20 contract). This looks like a stretch, as currently there is no carry in the Nov’20/Jul’21 soybean spread. However, assuming more soybean acres and a normal crop, I expect soybean stocks to build and a positive carry to return. The Nov’19/Jul’20 soybean carry reached 50 cents last year. It is not a stretch to look for a similar spread later this year.

Step three: In the spring of 2021, unwind the hedge (i.e., buy back Jul’21 futures and sell cash soybeans from storage) when the basis reaches 70 cents under the Jul’21 contract. Is this a reasonable basis goal? Weak basis has been a challenge in recent years, but 70 under July is a real possibility.

A quick recap of the process: A sale of $9.70 Nov’20 futures leads to $8.85 soybeans by harvest. Rolling your hedge to the Jul’21 contract adds 50 cents of carry. Basis improvement from 85 cents under the Nov’20 to 70 cents under the Jul’21 contract adds another 15 cents.

$8.85+0.50+0.15=$9.50 cash soybeans. This is 60 cents over the current cash price for soybeans, even as soybean prices are already 70 cents over harvest lows.

Are there risks? Of course there are risks, because nothing is 100%. The opportunity to price Nov’20 soybeans at $9.70/bu. is here. My greater concern is the Nov’20/Jul’21 carry not reaching 50 cents by harvest. Large carrying charges are not common in the soybean market, but lingering trade issues and the return of a normal crop point to a repeat of 2019, when carrying charges did reach 50 cents. And keep in mind that the forces that would lead to a smaller carry would also point to a stronger basis by spring 2021.

There you have it – three steps to $9.50 soybeans for the 2020 crop. This is marketing from start to finish. All it takes is a long view in planning, and a commitment to act when the opportunity is present.

How to get $9.50 corn – do the math

$9.70 Nov’20 sale of soybean futures

-0.85 harvest basis

$8.85 harvest price

+0.50 positive carry from Nov to July

+0.15 basis improvement (-70N vs -85X)

$9.50 soybeans by the spring of 2021

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