Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
April 6, 2001

Strategies for Stored Soybeans

If you have old crop (2000) soybeans in storage, storage costs continue to add up. Assuming nine percent interest and commercial storage charges of three cents per bushel per month, storing for an additional three months (until July) would cost an additional $0.18 per bushel. Interest alone (9%) would be about $0.09 for holding beans in bins until July. Unless serious weather problems develop, large soybean supplies will weigh on the market and limit any price gains. What are you going to do with them?

Is the market providing any signals? Basis has improved somewhat from the very weak basis of last fall and through the winter. Additional basis improvement is uncertain. July soybean futures are six cents premium over the nearby May contract or only six cents for storing (carrying) until July! This combination of small carry and limited potential for additional basis strength offers little market incentive to hold cash soybeans. The main reason for continuing to store would be expectations (hope) for higher price (futures) levels--a situation where you should consider owning the soybeans on-paper instead of storing.

Buying futures contracts or call options are the most common methods of re-owning grain on paper. The advantage to futures is that you can capture all of the futures price gain, but you still have downside price risk and margin requirements. Buying a call option essentially eliminates the downside price risk, but the premium (cost) reduces potential gain and may be more expensive that cash storage costs. For example, August soybeans closed at $4.42 on Thursday (4-5-01). A $4.40 (strike price) August call (expires in July) had a premium of about $0.23 compared to commercial storage costs (until July) of $0.18. Downside price risk with futures and the possibility that small price rallies won't recover option premiums makes these paper strategies less attractive.

A bull call option spread strategy might better fit this situation. A bull call spread is accomplished by buying an at-the-money call option and selling an out-of-the money call option. The objective is to capture limited price gains, reduce premium costs and reduce risk. Consider an example using Thursday's market. Suppose you sell cash beans, buy a $4.40 August call at about $0.23 premium and sell a $4.80 August call for $0.11. The net premium you pay would be $0.12 ($0.23 paid premium minus $0.11 collected premium) which is less than the commercial storage and interest cost of $0.18 for storing cash beans. Selling the cash soybeans eliminates the downside price risk. If August futures prices go up, you would gain on prices above $4.52 ($4.40 strike price plus $0.12 net premium). However, you would have $4.80 price cap resulting from the $4.80 call that you sell. At prices above $4.80, losses on the sold call would offset additional gains on the $4.40 purchased call.

The cost of the bull call spread compares favorably with continuing to store cash soybeans. The major problem is that potential gain is limited and you would not capture a significant summer weather rally. Remember counting on a weather problem is betting on the weather! Without weather problems, a bull call spread offers a good alternative for speculating on some price recovery while reducing risk. --Melvin


University of Missouri ExtensionDecisive Marketing - April 6, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010406.html -- Revised: April 20, 2004
breesm@missouri.edu