Producers' Watch

RE: Soybeans are stuck...


Interesting article with input from NDSU Extension Specialists By Renée Jean rjean@willistonherald.com.

Article summary:

Elevators in the eastern portion of North Dakota have pulled their bids for soybeans therefore offering no price in order to save storage space for the soybeans they have already bought on a contract basis.  

Nearly 75 percent of North Dakota soybeans generally go to an elevator, where they are put on a train for an export terminal or elevator in the Pacific Northwest to await transport via boat to China, but the current 25% import tariff has all but shut that down.  Grain is being harvested and will be ready to move soon but there is very little space to put it which causes two big problems…where to find space and how to generate cash flow. 

In terms of finding space…many farmers may consider temporary storage which can be disastrous for soybeans!  Ken Hellevang, NDSU Extension agricultural engineer and Agricultural and Biosystems Engineering professor, shares that storing soybeans is particularly challenging in that any storage option must prevent water intrusion and aeration to control the bean’s temperature is critical.  Farmers need to be prepared to store their soybeans until at least the Summer of 2019. 

As far as cash flow is concerned, farmers may want to consider hedging or find a hedge to arrive contract which locks in futures price for that day and allows the farmer to choose or lock in the basis at a different time.  The next thing to consider is selling corn or wheat to make room for soybeans.  Elevators and terminals need to be buying and selling something as this is how they make money.  Since there is no soybean market right now using corn as a substitute makes sense.  Sell corn now, and buy an option, so you can participate in the market if there’s a rally later, Olson suggested.  Finally, Olson shares that a CCC Green Loan, which uses the stored crop as collateral for a loan is an option.  “You still have to provide storage, but it will give you nine months to decide what to do, and the interest rates are lower than what get at the bank, so it provides some cash flow that can be used to pay some bills.”  CLICK HERE to read the entire article.

Graphic Image below sourced by Thomson Reuters Eikon

 Basis Map 09182018


Commentary - Rob Huston, VP Origination at Gavilon Group, LLC.

Today, most farmers feel like futures have more upside potential than downside risk and are very disappointed in local basis, especially on Soybeans.  While the article explains the dilemma and a quick glance at a basis map supports the story, the bottom line is that we are in unprecedented times with agricultural tariffs and a trade war with China, which effects our exports (or the lack thereof).

The specialists (in the article) from North Dakota provide some sound recommendations.  Let's take a quick look at the Grain Marketing Decision Aid* and discuss the different alternatives based on the bias of the individual farmer:

*- Source: Cooperative State Research Education & Extension Service/Northeast Center for Risk Management Education

If your bias is that futures have upside potential and basis will improve:

  • DP (Deferred Price) or NPE (No Price Established) Contract (to ensure you have a contract to deliver, yet still have upside in both futures and basis.  These contracts can and often do include additional fees, such as dump fees and/or monthly fees.  Be sure to inquire with your participating elevator.
  • Store the Grain (Long Cash Position)
    • On Farm Storage
    • Commercial Storage (where available...some elevators do not offer commercial storage)
  • Do Nothing (assuming your grain is already stored or you have enough On-farm Storage AND you have sufficient cash flow)
  • Call Spread (Bull Call Spread or Vertical Call Spread with a broker)
If your bias is that futures have upside potential and basis may get worse:
  • Basis Contract (Many elevators offer up to a 70% advance)
  • Minimum Price Contract (Many elevators offer up to a 100% advance against the Min Price)
  • Sell Cash, Buy Futures**
  • Sell Cash, Buy Call Option**
  • Sell Cash, Buy Courage Call**

If your bias is that futures have downside risk and basis will improve:

  • HTA (Hedge-To-Arrive) Contract
  • Store Grain, Buy Put Option**
  • Store Grain, Sell Futures**
  • Option Window**
  • Put Spread** (Bear Put Spread or Vertical Put Spread)

If your bias is that futures have downside risk and basis may get worse:

  • Cash / Spot Sale
  • Forward Cash Contract (some elevators will allow forward contracting up to two years out)
  • Buy Put Option & Basis Contract**
  • Sell Futures and Basis Contract**
  • Season Average Price Contract
  • Sell Call Option & Basis Contract**

** - these strategies can either be done through a broker or one can replicate these strategies within a cash grain contract with most elevators.  It is important to note that, entering one of these strategies within a cash grain contract does not result in a customer opening a futures/options account or having a futures/options position.  Cash grain contracts may employ commodity futures and/or options as a grain pricing mechanism, but they are not futures or options contracts.

 

F18Grain Marketing Decision Aid

 

Topics: Grain Marketing Programs

Rob Huston, Vice President

Written by Rob Huston, Vice President

Vice President, Origination at Gavilon Group, LLC. An innovative leader with a successful background in risk management, sales & digital marketing, futures, options and OTC Derivatives. More than 20 years of successful, progressive experience with a demonstrated performance record and diversified management expertise.

ProducersChoice

Stay in the know.
Sign up to receive
Producers' Watch insight by email.