Soybean Sales Dilemma

January 25, 2017 02:00 AM

Farmer strategies vary in light of big new-crop projections

When soybean prices rallied this past spring, Sharpsville, Ind., producer Monty Henderson decided to pull out of corn on some of his acres and into soybeans. He doesn’t regret the decision. In fact, he expects to change his crop mix even further in 2017, from a roughly 50-50 mix to a 60-40 split in favor of soybeans.

“I’ve already priced some in,” says Henderson, who also grows wheat, seed wheat, seed soybeans and Plenish high-oleic oil soybeans. “That gives me a little comfort.” 

Differing Approaches. The switch to soybeans makes sense in many states across the Corn Belt where soybeans are generally more profitable than corn in light of futures. Once the switch is made, some farmers are selling aggressively to secure November 2017 futures prices above $10, anticipating prices will decline on blockbuster crops in South America and the U.S.

“Early this fall, I looked at our break-even prices that we needed for soybeans. I figured out for 2017 we needed $8.75, give or take 25¢, depending on the farm,” says Maria Cox, who farms roughly 1,500 acres each of soybeans and corn in White Hall, Ill. “We’re making money if we get that cash price.”

Cox has sold 40% of her new-crop soybean acres between $10.15 and $10.35 per bushel on straight hedge-to-arrive contracts at her local elevator. If conditions mirror last year, she expects local basis to improve from 40¢ under to 20¢ or 15¢ under in the spring or summer. She has sold aggressively because she thinks soybean futures could fall to $9 quickly if the funds start selling out of their long position.

She’s sold an additional 30% on hedge-to-arrive contracts at a price of $10.22 on November 2017 futures. She then bought $11 out-of-the-money calls for 26¢ per bushel, setting a floor of $9.96 per bushel on those acres. “I feel good,” Cox says. “It might hurt a little bit if it goes up a lot, but we have the calls.”

Near the northern South Dakota city of Redfield, producer Wayne Dvorak is switching out of soybeans and into sunflowers because the crop is more profitable and a processing plant is located nearby. 

“They’ll give me a contract for the sunflowers, and I’ve got them marketed already,” Dvorak explains. 

Timing Considerations. In lieu of specialty crops, it makes sense to forward-price a substantial portion of any extra soybean acres farmers intend to plant in 2017, says Alan Brugler of Brugler Marketing & Management. As for existing acres, it might be best to stand down.

“Historically, most of the time you’re better off waiting until May or June to do it,” Brugler points out. “If you forward contract a lot this time and find out we’re going to have a $1 rally because of weather in Brazil or here, a bull-call spread would be a good strategy to re-own or unprice some of those bushels.”

It’s prudent for producers who typically sell 5% to 10% of expected soybean bushels to consider pushing that ratio as high as 10% to 25%, says Gary Schnitkey, ag economist at the University of Illinois. Soybeans simply pencil out more profitably than corn or wheat for many producers unless prices fall sharply.

“The longer-run price for soybeans at a $3.60 corn price would be $8.75,” Schnitkey says. “That’s the price where both of the crops have about the same profitability, and that’s a substantial decline.” 

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