Market Timing Critical for Best Returns
By: Ron Friesen
Let’s say you’re a Western Canadian soybean grower in late May or early June. You’ve sold most of your old crop and your new crop is starting to poke out of the ground. Markets, which have been in the doldrums for some time, have suddenly gone crazy. Futures prices for soybeans are 15 percent higher than a year ago. Cash prices are up to 20 percent higher. Also, the long-range weather outlook calls for a hot, dry summer. That would be bearish for yields but even more bullish for prices. What should your marketing strategy be going forward?
That was the situation facing soybean growers earlier this year.
Up until spring, soybean markets had been bearish for months. Soybeans were being discounted because of large carryovers in the U.S. and the expectation of a big crop in South America. But that changed suddenly. Brazil experienced hot, dry weather while Argentina received heavy rains just as the soybean harvest was getting underway. That meant a smaller crop than the potentially record harvest which had been expected.
The possibility of a short crop in South America prompted China, the world’s largest soybean importer, to shift its buying patterns to the U.S. sooner than usual. With China suddenly scrambling for soybeans, markets responded psychologically. CBOT soybean futures began recording their highest price since August 2014. November futures, which had ranged from $9.80 to $10.50 USD a bushel in June 2015, jumped to over $11 USD a bushel in June 2016. Cash prices for October delivery in the Red River Valley climbed from around $10 a bushel a year earlier to $12.85 a bushel and counting this past June.
Of course, as every grower knows, soybean markets can be very volatile. Market corrections can happen any time. This spring, however, it appeared as if the rally might actually have legs.
One reason was the weather. Forecasters were suggesting that a waning El Nino phenomenon might switch to a La Nina pattern by late summer. If that happened, it would produce hot, dry weather just as beans were starting to fill their pods. Although yields might be lower, a hot, dry summer combined with production problems in the U.S. soybean belt could push prices even higher.
For growers caught up in a bullish market, it was a conundrum. What should their marketing strategies for the new crop be? Should they lock in a price early? Or should they wait to see what the markets would do later on?
The answer? Both.
Al Kluis, a commodity advisor and broker with Kluis Commodities in Wayzata, Minnesota, recommends producers forward contract between 30 and 50 percent of their new crop, based on conservative yields. He also says producers should have sold at least 80 percent of their old crop by seeding time to clear bins for the new crop.
Kluis encourages growers in a bull market to sell a sizeable chunk of their new crop in advance because prices could be lower by harvest time.
“When you’re back in a profit zone, you don’t want to screw it up.”
But Kluis has several reasons for believing market fundamentals are sound. He thinks China will continue to source soybeans from North America aggressively because the international market could be short after July.
Another positive sign is huge participation in agricultural futures by commodity funds. He says Wall Street hedge funds earlier this year took a “massive long position” in soybean and other commodity futures. That should keep prices reasonably strong for now.
All of which is good news for soybean growers, said Kluis.
“Soybeans are the most profitable alternative U.S. and Canadian farmers have right now. It’s way, way more profitable than wheat. It’s definitely more profitable than corn. It’s going to pay a lot of bills.”
Not everyone agrees that forward contracting 50 percent of a new soybean crop is the best strategy. Mike Davey, a market analyst with FarmLink Marketing Solutions, is more conservative.
Davey says he would be comfortable with selling 20 percent of a new crop in spring and possibly advancing that by another 10 to 20 percent by early summer. But he suggests growers should also exercise caution in case the weather turns hot in late July and early August when seed development occurs.
“If you throw heat on that baby come August, all bets are off and those futures will trade higher. Maybe the basis widens but the futures aren’t going down.”
Davey agrees it’s a good strategy to have 80 percent of the old crop sold by spring. But it depends on how the new crop is looking at that point.
“If you’re comfortable with what you have coming, then let the old crop go. But do get some new crop on the books.”
John Duvenaud, an analyst with Wild Oats Grain Market Advisory, was also conservative when asked if growers should price soybeans early or wait.
“This market is moving and let’s just give it some time,” said Duvenaud, adding he doesn’t feel comfortable with forward contracting more than 20 percent of a new soybean crop.
“I don’t like selling what I don’t own and I don’t like recommending it either,” he said. “I would just sit and wait and let this work its way out. Once you start combining, you should start selling.”
Scott Ryrie, merchandising manager for Richardson International, believes more soybeans were forward booked this year than in previous years, due to robust prices.
But when it comes to actually delivering soybeans, Ryrie warns that Western Canadian growers have a very small delivery window.
“Soybeans are generally not a storage crop,” Ryrie said. “The bulk of the crop moves in October, November, and December. Sometimes we slip into January. So you’ve got to be focused on those months. After that, you’re rolling the dice.
“Because after that, as you move into February, March, April, the big South American countries start coming off and you’re at a huge risk of what price you’ll be receiving for your product at that time.”
Dale Heide, president of Delmar Commodities in Winkler, Manitoba, thinks it’s okay to forward contract 30 percent in spring and reserve 20 percent for July. “But I don’t ever think a guy should sell more than half,” he added.
Heide doesn’t see any difficulty marketing soybeans this year. Because production has increased dramatically in recent years, grain companies can now assemble 100-car unit trains to ship soybeans to Vancouver for export to Asia.
“Basically, they’re running after your combine in the field asking to buy your beans. Absolutely.”
But make sure you have soybeans to sell, Heide emphasized. For that reason, he urges growers to manage their crops carefully in order to maximize yields. That includes inspecting fields, checking for pests, and spraying for insects if necessary.
“Don’t lose five bushels. Five bushels is a lot of money this year,” said Heide.
Above all else, hone your marketing skills, he stresses.
“Learn to be a good marketer. You can make just as much money marketing a small crop as you can growing a huge crop and making bad decisions.”