Farm Management Specialist
University of Missouri Extension
|May 14, 1999'99 Soybeans -- What Strategy?
Currently soybean prices are the lowest they have been since 1976. If USDAs Supply and Demand projections (issued on Wednesday) hold up, its going to get worse! The expected soybean acreage expansion results in another potential record crop of 2.88 billion bushels. Even with expectations of record demand in 1999-2000, ending stocks are expected to grow to a record 595 million bushels. These bearish numbers produce an expected average price of $4.35. That would be the lowest average price since 1971-72!
This bearish outlook doesnt offer much hope for improved soybean prices. In addition, continued wet weather and corn planting delays would only increase soybean acreage. The demand projections may also be optimistic when compared to this year. The resulting supplies are large enough that only significantly stronger demand or serious dry weather would have much positive impact on prices. In the face of all of this, what is the marketing strategy for soybeans?
One strategy is to try to "make the best of a bad situation." This strategy accepts the USDA expectations of large production, big carryover and lower price. If prices are going to get worse, then the idea is to take steps to avoid the lows at or below $4.35. While any summer price rallies will probably be very limited, they could be used to forward contract for fall delivery at prices in the upper four-dollar range. If prices decline, as expected, the LDP could be used in the fall to enhance the contracted price resulting in a net price received that is above the $5.26 national loan price.
Another strategy is to take the position that prices are bad, cant get much worse, wont stay low forever and will eventually have to improve. Soybean prices are below $5, but they havent spent much time below $5 since 1972. They were below $5 for about seven months in 1975, a few weeks in 1985 and for almost eight months in 1986. Currently theyve been less than $5 almost four months, so how much longer will they be this low? There is still a lot of time (more than a year) to sell new crop beans. Markets typically bottom when everyone is bearish and expects low prices to last forever -- which describes the current situation. The market loan or LDP provides a price floor that is above current market prices and this limits the risk associated with waiting (hoping?) for a price recovery. This strategy uses loan price as the floor and, if prices improve, waiting (probably storing) for better prices sometime in the year ahead. What are the risks? Price protection is limited to loan price and significant storage costs could accumulate before the beans are sold resulting in a net price well below loan price.
Which strategy do you use? History suggests that
eventually prices will get better, but when? It is very possible that soybean prices will
get worse before they ever get better and they may not get better anytime soon -- likely a
year or more. The market loan or LDP does help provide downside protection whichever
strategy you choose. Along with price risk, your approach to marketing new crop soybeans
may depend, as much as anything, upon how long you can afford to wait before you have to
have the money. -- Melvin
Decisive Marketing - May 14, 1999