Chip Flory: Bin It But Don’t Forget It

November 8, 2018 01:04 PM
 
From Extension economists to brokers to lead analysts at small and large brokerage firms, many had the same advice for unpriced soybeans when combines hit the field: Put it in the bin ...

From Extension economists to brokers to lead analysts at small and large brokerage firms, many had the same advice for unpriced soybeans when combines hit the field: Put it in the bin ... or in a bag ... or in a machine shed ... or on a concrete slab. Just don’t sell.

That advice to “bin it” has very little to do with price.

When China initiated retaliatory tariffs on U.S. soybeans, officials said they were committed to alternative sources of protein. And so far, that has been the case. As a result, demand for northern-grown beans to be shipped out of the Pacific Northwest has been almost nonexistent—and the resulting basis weakness flooded the Midwest. Through a combination of price and basis weakness, the market accounted for China’s 25% tariff by dropping U.S. bean export prices to a 25% discount versus beans originating from Brazil.

The plan is to give bean basis a chance to recover. Market-watchers in the eastern Corn Belt expect bean basis to climb back to “nearly average” levels based on heavy domestic demand from southeastern pork and poultry operations. Analysts in the Central Belt expect a basis recovery to stop short of average levels, but still better than in markets further west and north.

Some recommend leaving basis and price open on beans in the bin, while others advise locking in price with futures and/or options. All advisers agree these beans should be priced for summer 2019 delivery to capture the price premium those contracts hold to front-month futures.

Leaving basis and price open on stored beans is a high-risk, high-reward strategy. If the U.S. and China work out their differences and normalize trade, bean futures will see a “relief rally” and basis will improve, which will result in a much better selling opportunity.

However, if trade issues linger into the coming year, prices will struggle but basis should improve to pull beans out of storage. Many agree the bean market will maintain a (nearly) full-carry structure, but spot-month futures will be tethered near current prices. If that’s the case, lock in a price for summer delivery, but leave the basis open.

Two strategies to consider:

  • Defensive hedge. A short July bean futures against beans in the bin locks in price, but leaves basis open. If a relief rally does happen, it gives you the flexibility to exit the hedge, reopening upside price potential. Without a rally, you lock in basis when ready to deliver. Net price is the price at which the hedge was established plus basis at time of cash sale.
  • Hedge-to-Arrive (HTA) cash contract. For a fee, the buyer establishes a short position in July futures to set the price. In the event of a rally, you’re locked into the contract price. Without a rally, you lock in basis when you’re ready. The net is the price at which the HTA was set plus basis. 

All episodes of “AgriTalk” and “AgriTalk After the Bell” are available on demand via the “AgriTalk” mobile app. The app can be downloaded for free on Apple and Android devices. Learn more at www.AgriTalk.com

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