Soybeans Ready to Retest $13 Highs! Then What??

December-28-07

My last report on November 21, 2007 laid out the possibility of retesting the $12.90 nearby soybean futures contract all time record high price. While prices near the teens was startling a month ago, $13 futures are not that far way now.

July 2007 futures made contract highs today (December 28, 2007) at $12.72 per bushel. So, the retest of the $12.90 all time high is virtually here.

The November 21 article also laid out reasons why $15 soybean prices are not out of the question in the current environment, so less pick up the discussion of even higher prices. One reason to believe that the highs are not in is to examine the market price behavior which has not exhibited the classic “topping patterns” yet. Generally when a commodity market is pushing toward a top, there will be many limit move days. Generally, there will be multiple limit up moves perhaps even on consecutive days. Also during the period of topping, one often sees both limit up and limit down days, that is to say enormous volatility.

Maybe the market is just at the beginning of the topping period? The nearly 40 cent up market the day after Christmas may be a signal that the topping action is now beginning. That topping action could extend over the next couple of moths and would likely mean a WILD RIDE is in store.

The headline for soybeans remains a usage base that is just too big and needs to be reduced. The leading story is of Chinese purchases which are now 21 percent above last year at this time. Rapid food inflation internally and an abundance of U.S. currency means a continued record pace of purchases from China. So far this marketing year, China represents 47percent of all the U.S. commitments of soybeans to the export market.

More importantly, the pace of export sales has not slowed down as prices have risen by multiple dollars this fall. At the current pace of sales, the U.S. will be sold out of 2007 crop beans in the next 8 to 10 weeks. This means by the end of February or by mid-March, which is well before South American beans are available. The conclusion is that prices need to increase more to convince end-users to cut usage more rapidly.

How much more prices need to increase is not easy to say. The first mark is to retest the historic $13 futures price level which would put cash bean prices at $12.50 per bushel or higher. Above that, there is no historical guideline. The most recent price swings in futures have been about $1.50 per bushel so that suggests $14.50 on one upward swing (from $13) or $16.00 on two upward swings. It’s hard to imagine prices will top out above that, and of course talk of those prices will look ridiculous if the South American crop comes in as record large and the U.S. crop next summer is large as well.

Timing is always critical in markets, and no one can say just when tops will occur. However, it remains reasonable (with current information) to expect the market to be most concerned during the February and March period when South American yields are being determined. Any weather problems in the Southern Hemisphere at that time would be most damaging to soybean yields there.

For soybean producers, this is going to be a breathtaking experience. The first pricing point to consider is around the $13 historic futures high. As we have said that level is basically available now. Often market prices will hesitate (or consolidate) around these historic highs, as market participants wait for further information that prices can move above historic highs.

Above that, continuing to do some pricing on intervals of about $1.00 might be considered ($14, $15, and $16). Planning to be about 75 to 80 percent priced on old crop by mid-to-late March might be reasonable.

Soybean supplies will be very tight by the late winter and spring and this should continue to result in basis improvement. This also means that the best strategies are to hold on to cash soybeans until you are ready to price them. If beans are in on-farm storage, then hedge-to-arrive contracts for delivery next summer may give maximum opportunity for gaining from basis improvement.

If old crop beans continue to move up, new crop will also follow, but not nearly to the same extent. If old crop beans move up $1.00, then new crop might move up only $.40. Pricing opportunities will be extraordinary on new crop. Most will want to consider having the traditional 25 to 35 per cent forward priced by late-winter or early-spring. Others will want to be even more aggressive, moving up to 50 percent or higher. When pricing above 50 percent of anticipated production it is good to consider option pricing strategies that do not commit to a specific price or specific volumes of beans sold.

Everyone should closely study 2008 crop insurance alternatives this winter and thus be better prepared to make final decisions as the deadline approaches in mid-March.

Chris Hurt
December-28-07
Purdue University