One of the interesting things that happens in a market when end-users believe that supplies are more than adequate is the marketplace actually starts to discount prices for prompt movement of those commodities. With a record-sized North American soybean crop in North America this fall, we’ve now shifted the market to show very big carries in oilseed prices. This raises the question: How do Ontario producers adjust their marketing plan in order to take advantage of this evolving market situation?
There’s a difference between a market that will show a carry, and a market that will earn a carry. This fall, the soybean market is certainly showing a carry, which means that a seller can forward contract soybeans for delivery next spring at more than the cost of storage and interest to hold onto them until the contract delivery period. At the end of October, a farmer in Ontario with his own bins can book soybeans for delivery in April of 2018 for more than the cost of storage and interest to keep the soybeans for six months. During harvest there is a cost of about $22/tonne to hold soybeans off the market for 6 months or about $3.60/tonne per month. (A dime per bushel per month).
For the market to “earn” carry, the spot price of uncontracted soybeans needs to rise by that same dime per bushel per month without any hedging strategy to protect the price spreads. Strictly speaking, supplies need to be pretty tight for the market to simply earn a carry as buyers scramble to cover off their requirements.
The obvious problem with storing unprotected soybeans until the spring of 2018, is that by the time the ice in the St. Lawrence Seaway breaks up and Ontario can resume exporting soybeans by ship into the international market, we’re also into the time of year when Brazil and Argentina are in harvest. So we’re effectively storing soybeans into the time when the world has its greatest supply.
It is certainly not impossible that South America could have soybean production problems with their coming crop year. Farmers in the southern hemisphere face the same myriad of production challenges as we do in Ontario or any other production region. Brazil and Argentina could have floods during planting season, or a drought later in the growing period. They could experience diseases like Asian Rust, or infestations like aphids, but there’s no guarantee that any of those things will occur. This is a bit like betting that the Toronto Maple Leafs will win the 2018 Stanley Cup. While it is certainly not impossible, there’s also no reason to believe that it’s assured.
In terms of managing farm business risk, the best course of action for growers planning to store soybeans is to forward contract a substantial portion of their on-farm inventory for spring delivery and get the carry locked in. Retain ownership of the last 10 % or 15 % of the crop as “Las Vegas Beans” in case things go amuck in the southern hemisphere and that leaves some opportunity if prices suddenly take off. The other thing that’s important to remember is that most of us still have a lot of our 2018 soybean crop unmarketed, and if prices do find a reason to rally, producers can reward those gains by selling next year’s production.
The old saying is “futures erode into the cash,” meaning that the farther-away months in the commodity futures markets are the highest prices, and the nearby futures month (the cash contract) is the lowest. So waiting on an opportunity to lock in a higher contract price for spring shipping is likely counterproductive. The risk premium that is built into the forward month’s prices is based at least in part on the potential that there are some challenges in getting the South American crop in the ground and well started. The more time that passes, the lower the potential that a problem will develop.
With large soybean crops in both North and South America over the past couple of years, we have reached a situation where the global supply of soybeans has become extremely big. This means that we are now firmly in a marketplace where there will be a carry in futures prices, and farmers need to adapt their marketing behaviour to focus their soybean marketing on the forward delivery months, rather than trying to use a hoard-and-hold strategy.
There will still be reasons for the markets to rally and drop but we need to focus our behaviour on marketing the forward months when the rallies come around.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
