Acreage surprises, poor growing season weather, energy prices, dollar value, economic conditions and policy decisions create a complex environment for managing price risk.
By Melvin Brees
The USDA’s February world Agricultural Supply and Demand Estimates made no changes in supply/use for soybeans and wheat. Adjustments to global supply/use projections for soybeans and wheat were relatively small with only minor carryover changes.
Recent price action illustrates some of the market risk producers face for 2011. In just over a week, old crop soybean futures prices declined almost $1, and new crop (November 2011) futures prices slipped more than sixty cents.
Market prices have exhibited volatility since late June 2010. November 2011 soybean futures prices have ranged nearly $4.90. Occasionally limit or near limit prices moves up or down have occurred. Price uptrends remain in place, and many of the analysts remain confident that prices have no way to go but up.
While most are bullish, some analysts caution that at some point high prices should curtail demand. Soybean exports may be shifting to South America. Brazil is expected to have large production and some analysts believe it will even exceed the USDA’s current estimates.
Late season rains have helped the Argentine crop. Recent export sales reports have been below expectations and suggest that the shift to the Southern Hemisphere is beginning. However, there is little evidence that high prices are slowing corn or soybean use.
Old crop, new crop
It is important to note that strong demand, tight carryovers and higher prices are more of a factor for old crop (2010-11) than new crop (2011-12). Although there is concern about 2011 planted acreage and the need for large production in the coming year, the tight supplies are more reflected in old crop futures prices.
November soybean futures prices are about thirty cents less than March futures prices. This is not an unusual situation in a strong demand market, but it also illustrates that the market recognizes that 2011 production could rebuild tight supplies somewhat. While acreage surprises or poor growing season weather could result in sharply higher new crop prices, the market is already sending signals that prices for 2011 crops may not be as high as prices for the 2010 crops.
They may be lower than old crop prices, but current new crop futures prices of more than $13.70 for soybeans are well above some of the early projections for 2011-12 average prices. Although the USDA will not issue their first monthly 2011-12 supply/use projection until May, they did release their February long-term baseline projections. These included soybean acreage of 78 million acres and price at $11.20.
Other early projections by some analysts project soybean plantings of near 77 million acres. Other price projections range from $10.90 to more than $12.00 for soybeans.
Have a risk management plan
Many other factors could contribute to price risk. These include energy prices, dollar value, economic conditions, policy decisions, etc. along with foreign political unrest, livestock disease outbreaks and other disasters to name a few. This creates a complex environment for managing price risk.
Revenue Protection crop insurance policies provide a starting point to manage some of the risks. Base prices will be established in February and currently are on track to be more than $13.50 for soybeans. While this provides revenue protection, it does not cover that much price risk if normal yields are produced. Revenue protection is an important risk management tool, but more is needed to manage price risk.
The marketing strategies offered in last month’s “Decisive Marketing” should still be considered. These include setting upside price objectives along with downside price traps to trigger sales. Trailing stops can still be used as a method to follow the uptrend. Options are still expensive, but they can also provide price protection. Spreading sales can capture good prices and lead to a respectable average price.
Soybean prices have recovered from the recent break. There are good arguments for higher prices, but downside price risk should be recognized, too. It appears that prices will be good; they just may not be this good!
If sales are delayed, it is very important to know what prices or what market action will trigger sales.
Melvin Brees is the market/policy Extension Associate, FAPRI, University of Missouri. Read his column “Decisive Marketing” in its entirety at www.agebb.missouri.edu.