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Market Strategy

September 4, 2009
By: Jerry Gulke, Top Producer Market Strategy Columnist
 
 


Find the Right Soybean Price

Just one year ago, I discussed changes in the major items that took us to the "commodity bull dance" of 2007/08 (weak dollar, world economies, fuel prices). The outcome was not pretty for just about everything we raise, including soybeans. Now the question is whether the setback is only the "pause that refreshes" or a return to deleveraging and disinflation.

Fortunately, China has continued aggressive purchases, outstripping the most optimistic scenarios. USDA projects total 2009/10 exports to nearly match last year. 

Due to record-low South American exportable supplies beginning this month, the U.S. will have the lion's share of the soybean export market to itself until harvest begins in the Southern Hemisphere.

Watch USDA's Reports. Losing even a bushel of yield is more important than losing or gaining a million acres: A 1-bu. drop in yield means a 76-million-bushel drop in production, whereas a million acres is 41.5 million bushels.

With nearly 4 million acres of late-planted soybeans in North Dakota, plus delayed maturity in the northern half of Minnesota and South Dakota on another couple million acres, early frost does not have to get into Iowa or Illinois to make a difference.
A 2-million-acre weather-induced reduction and a drop of 1 bu./acre (still 2 bu. better than 2008) means another impossibly tight U.S. stocks situation throughout 2010.

Price rationing of demand may occur earlier rather than later in the marketing year, and an early 2010 weather concern in South America could be a major price enhancer.

It will be easy to underestimate just what a supply concern will do for prices this fall. The price chart shows that under the current world economic supply/demand situation, $11 soybeans are overpriced, while $8 gives U.S. farmers little incentive to sell with crop revenue protection close at hand.

Strategy. Options (puts/calls) and option spreads will play a bigger role in my sales: Buying a $9 put and selling an $8 lower put to salvage another dollar downside risk for net cost of about 25¢ protects me to $7.92, where my Group Risk Income Protection kicks in.

At a minimum, we should see much better basis this fall/winter than normal, along with an inverted market in which later futures are lower than current prices.

I suspect we have the upper hand in managing our risk versus the end user who now has much more to think about. A price near $8 sends the wrong signal to South America. The right signal, near $11, should promote farmer selling and expansion of South American acres. Anything in between is up to our own discretion and market prognosis!



Jerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact Jerry at smsjgulke@aol.com or (312) 896-2080.

 



Top Producer, September 2009
 

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FEATURED IN: Top Producer - SEPTEMBER 2009

 
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