How do you prepare for the future when so many uncertainties abound? As we enter 2017, proceed with caution. I’d prefer to take a small profit, say around $50 per acre over all fixed and variable costs rather than swing for the bleachers and hope to price into a strong summer market weather scare event. I would continue a policy of the lowest possible cash investment in the crop for 2017 and go with only tried/proven expenses rather than be an early adopter. This is not my long-term strategy; it’s just for 2017!
While it’s still early, the market’s attitude suggests under the best of circumstances we will only need about 2.5 million soybean acres in 2017 and a trendline yield of 47 bu. per acre for even the most bullish demand expectation. I’m also guessing seed salesmen and elevators think the acreage response could be as high as 4 million to 5 million.
The soybean market is in a unique place right now—we have an inverted carry charge market for 2017 while corn is still offering carry. This means the November 2017 soybean contract is at or above deferred contracts—which is the market’s way of saying it wants more acres, even with the trade bias coming. It’s natural to want to wait until summer 2017 to start pricing the expected crop. My concern is, if the trade is correct and acres do come in, the only way November 2017 soybeans will exceed the recent price action is if we experience a yield reduction event.
So we are right back to square one. Early market premiums are being offered for soybeans while corn is still discounted. Producers are waiting for a summer pricing event, but history suggests producers have a difficult time pricing inventory during a supply-driven bull market. What can producers do to improve their chances of effectively pricing their expected 2017 crop? Here are my suggestions:
- Plant more soybeans, but lock in a floor above $10.
- In the February to March period, buy a moderate level of call protection against all cash or futures transitions.
- Keep all soybean hedges in the November contract since no carry exists.
- If futures are used, roll into long deep-in-the-money puts if we start to see a solid technical breakout in November soybeans after the mid-May planting period.
- If limited on-farm storage exists, sell soybeans off the combine rather than building more storage capacity.
- Use winter market weakness in late January to mid-February to buy out-of-the-money September or December calls to insulate cash and futures sales.
- Slowly scale up selling December 2017 around $4.10 basis and prepare to be done by mid-June or $4.30, whichever occurs first.
- If the weather turns dry and a technical breakout is seen after mid-May, roll all short positions into long puts.
- Plan to be close to 100% sold with soybeans before being 50% sold of expected corn.
- If on-farm storage space is limited, plan on holding corn for basis and carry incentive.
- With wide basis and low prices, we should see the next long-term bull move in late 2017 or early 2018. It’s better to hold ownership on paper than in the bin as basis narrows.
- When hedging 2017, move slowly. We are doing everything we can to put a bottom in wheat prices, but it might take longer than bankers want. If you decide to plant soybeans instead, sell them first.
Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions.