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harvesting soybeans
BE READY: It’s important to have a futures price objective for unpriced bushels of beans while the uncertainty of Brazilian production exists.

Set your soybean futures price objectives

Be prepared to take advantage of winter pricing opportunities for soybeans.

It’s early-January and cash flow needs are on the mind of most farmers and their lenders. The decision whether to market corn or soybeans likely depends on your actual 2018 breakeven price, cost of grain ownership since harvest, and your expectations for both nearby and deferred futures prices.

U.S. farmers produced a record soybean crop projected at 4.6 billion bushels. The Dec. 11 USDA World Agricultural Supply and Demand Estimates (WASDE) indicated U.S. soybean ending stocks at the end of August will be 955 million bushels, the largest in history. The weighted average national cash price for the marketing year is projected to range between $7.85 and $9.35, or a weighted average of $8.60 per bushel.

The nearby soybean futures contracts have rallied nearly $1 per bushel from their harvest low in mid-September through mid-December. In addition, basis has narrowed by an average of 30 cents per bushel since harvest at most central Iowa co-ops.

These low cash prices are mostly offset by the Market Facilitation Program payment of $1.65 per bushel based on 2018 actual production. Add the MFP to the cash soybean price being offered and compare this to your actual breakeven price. Now consider your cost of ownership for storing these unpriced bushels monthly. These costs could approach 8 cents per bushel per month for commercial storage and financing charges of 6% interest.

Using Fibonacci retracements
Here’s a pretty simple way to establish a futures price objective that has proved the test of time: Fibonacci retracements. Fibonacci (1175-1250) was an Italian mathematician from the Republic of Pisa. He was considered one of “the most talented Western mathematicians of the Middle Ages.”

A Fibonacci retracement is a term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going higher). The retracement ratios are found in the Fibonacci sequence. The most popular Fibonacci retracements are at 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%. The midpoint would be a 50% level of retracement.

Fibonacci retracements can measure the potential for the March 2019 soybean futures prices to retrace its movement from April 2 high of $10.54½ to the Sept. 18 low of $8.39¾. That’s a difference of $2.14¼ per bushel. The Fibonacci method suggest multiplying this amount times 38%, 50% and 62% as representative retracement levels.

This would leave price objectives for the March ’19 soybean futures contract at levels around $9.22, $9.47 and $9.72 per bushel, respectively. The $9.22-per-bushel objective was reached on Dec. 3 and again on Dec. 12. If you needed to sell soybeans this winter, this could likely have been an attractive level. The best basis will likely be at a soybean crush facility, while most elevator and co-op bids will be 20 to 30 cents wider in basis.

Selling the carry
Soybean futures price carry is the difference between the nearby March soybean contract and the more distant or deferred months of May and July. On Dec. 31, soybean futures carry was 11 cents from March to May, and an additional 12 cents from May to July. This 23 cents would likely cover the cost of on-farm stored bushels, but not likely those bushels stored commercially.

Consider capturing this carry (May or July) via a futures hedge or initiate a hedge-to-arrive (HTA) contract for spring delivery when basis tends to narrow. Delivering bushels in April or May could provide some of the best basis opportunities, as farmers and elevators are busy with spring tillage, applying fertilizer and related planting activity.

This would leave price objectives for the July ’19 soybean contract at levels around $9.33, $9.55 and $9.76 per bushel, respectively. The 50% level or $9.55-per-bushel objective was reached seven different days between Dec. 3 and 12.

Note the July ’19 soybean contract goes into delivery around June 28. Use late June as your deadline if you decide to re-own these bushels via long July soybean futures (basis contract) or the use of a July call option (minimum price contract).

Fibonacci retracements are easy to calculate, especially when large futures price moves have occurred, such as soybeans in 2018. When using these retracements, try to sell July futures or HTA using a July soybean futures contract to capture the carry that still exists between the nearby March and deferred July contract.

March Fibonacci retracements chart

The Brazilian soybean harvest is just beginning, and yield prospects are above average despite a dry December. Expect soybean exports from Brazil to begin shipping in mid-January, targeting Chinese needs with the ongoing tariffs of 25% on U.S. soybeans.

Lessons learned
There is no one technical chart signal that works 100% of the time. Many speculators use technical signals such as Relative Strength Index (RSI), Moving Averages and Stochastics. The importance is having a futures price objective for these unpriced bushels that need to be marketed to generate cash flow this winter or spring.

July Fibonacci retracements

Be prepared to take advantage of winter pricing opportunities for soybeans while the uncertainty of South American production exists. Expect China to purchase large volumes of Brazilian soybeans to offset the shortfall of U.S. soybean sales this fall and early winter due to ongoing trade disputes. The U.S. ending stocks are forecast to be record large at the end of August.

Johnson is an Iowa State University Extension farm management specialist. Contact him at sdjohns@iastate.edu.

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