Farm Management Specialist
University of Missouri Extension
|March 19, 1999
Sell $4.35 soybeans for $6.00?
The possibility of another large crop and record ending stocks has led to price predictions of $4.35, or less, for new crop soybeans. Assuming that the government loan price remains unchanged, using the market loan or LDP (loan deficiency payment) can provide price support at about $5.25. Is that the best that can be done?
In recent weeks, Ive suggested that flexible strategies using a variety of marketing tools would be needed this year. Lets consider one possible strategy to illustrate how you might combine marketing methods to make this work. November (new crop) soybeans are about $5.00 to $5.05. Suppose prices follow seasonal patterns and increase enough that by early May new crop cash soybeans could be sold for $5.10. This is below loan price, but considerably above $4.35. You decide to contract for harvest delivery, making sure the contract is written so that you retain beneficial interest in the beans and are still eligible for the LDP. Now suppose the predictions are correct and prices are at $4.35 at harvest. The LDP would be about $.90 ($5.25 loan price minus $4.35 cash price). You collect the $.90 LDP, deliver the beans on contract for $5.10 and net $6.00 on a $4.35 market!
The idea behind this strategy is to limit risk and still try to use the LDP to enhance net price received. The speculative price risk is limited because the beans are priced before the LDP is claimed. The LDP still functions as a price floor if the price goals arent met. This is in contrast to what many unsuccessfully tried last year by first claiming the LDP, removing the price floor, and then speculating on higher bean prices.
Understand, this example assumes November futures will rise forty to fifty cents this spring so that you are able to contract for fall delivery at $5.10. If prices dont go that high, you can set a lower target or still have the loan price as price floor protection if you arent able to forward contract. The strategy also assumes that prices will fall to $4.35. If you get the contract and prices dont fall as low as $4.35, you would still be eligible for whatever LDP was available to enhance your price--as long as prices are below $5.25.
What if dry weather sends prices sharply higher after you contract for cash delivery? This is always a concern that causes many producers to pass up profitable prices because they dont want to miss something "better." You could buy a call option to protect against missing higher prices. This would lower your net price by the amount of the option premium, but would give you this additional price protection. Another alternative would be a minimum price cash contract. There are other risks. Reduced production during a drought is one example. Crop insurance could help here or you could substitute a put option for the cash contract.
While this strategy may seem somewhat complicated, it illustrates how using more than
one marketing tool enables capturing higher prices in a low price situation. There are
other combinations that could be used and different price goals could be used for making
the sales. Complicated or not, it is becoming necessary to become comfortable using a
variety of marketing methods that can be combined into a flexible strategy for risky
Decisive Marketing - March 19, 1999