Further Liquidation for Beans

Published on: 16:22PM Jul 24, 2013

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It was another massive selloff day for August soybeans and soymeal.  August soybeans were 70 cents lower (lock-limit) and August meal was $20 lower (also lock-limit).  That means we will have expanded limits for both products tomorrow.  August meal was synthetically trading another $18-$20 lower than limit-down which means it should open sharply lower on the night session.

The weakness was all follow through selling from yesterday’s rumors that China would be releasing 3 MMTs of reserves onto their domestic market.  Basis was down sharply and now we have had a two day drop totaling $1.27 ¾!  That is about a $2.00 difference in cash soybean prices from Friday afternoon until Tuesday afternoon.  Once the ball gets rolling it can be hard to slow the downward momentum.  Margin calls can result in a cycle of further weakness until the weak longs are all out.  One thing to notice is that November soybeans have not been nearly as weak.  This could be for the fact that many of these longs were probably bullspread August-Nov.  As they liquidate their position, they have to sell August and buy the November contract, hence the support we have seen in that contract.  Up until now November soybeans have been able to capture some support from the tightness of old crop beans.  Take a look at the August soybeans chart with a November contract overlay below:

 2013 Soybeans

We have been talking about the excess premium built into the market for some time now.  We haven’t had excellent weather everywhere, especially in the western belt, but still we have trended lower.  In our opinion this excess premium is from market conditioning after having three disaster growing years in a row.  Many in the market have put a higher likelihood of a repeat weather disaster than probably necessary.  As we are getting past some of these monumental points in the year like pollination, more premium comes out.  Soybeans are in that stage where a weather problem could still develop.  We put that chance the same as any other year.  But if we get into August and rains are adequate, look out for the large long position in beans to run for the exit.

If December corn keeps breaking it may start to get into the territory where revenue insurance starts paying.  If a producer grows exactly 100% of his/her actual production history and has an 85% policy, he/she would be protected below $4.80 ¼ ($5.65 x .85).  There is plenty of year left so if we really dip below this level it may not be a bad idea to get/add call protection on just to protect your sales and insurance.   It is important not to do this if you do not have enough downside protection.  To see how this strategy may help your marketing plan give us a call for a free consultation using the AgYield software.  You can plug in your current sales, insurance, futures and options, and cost of production to see how future transactions can help or hurt your bottom line.

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