Posted by: usset001 | October 15, 2008

Carrying Charges in the Soybean Market

I want to expand on my new way of assessing carrying charges. Previous posts focused on the corn market (see September 29, “Earl Eitheror and a new definition of large carrying charges” and October 8, “An illustration of large carrying charges”) but the same approach can be applied to soybeans. Yesterday the Nov’08/Jul’09 futures spread closed at 47.25 cents (Nov’08 @ $8.96 and Jul’09 @ $9.4325). Cash soybean prices are trading in the area of 80 cents under in Southwestern Minnesota, or $8.16 per bushel.

The soybean harvest is here and many farmers are asking the question, “To store or not to store?” I think the nature of carrying charges – large or small at harvest – speak directly to that question, so let’s apply my new way of assessing carrying charges to the current situation in soybeans.

October 14

Carry/month = 47.25 cents/8 mo = 5.9 cents/mo.

Monthly interest cost = $8.16 cash price * 6% interest/12 months = 4.1 cents/mo.

Carry/Interest = 5.9/4.1 = 145% 

The Nov/Jul carry is nearly 1.5 times the cost of financing soybeans in storage. This figure is not nearly as large as the 300% measuered in corn just days ago, but it is large in the world of soybeans. I noted in an earlier post that carrying charges of 200% of interest costs are not uncommon in the corn market – my analysis shows 10 years since 1990 where the Dec/Jul corn carry was larger than 200% of interest costs. But last nights measure of the Nov/Jul carry at 145% of interest costs is the largest mid-October carrying charge I’ve measured in the soybean market since 1990.

Let’s view this through Earl’s eyes. He would sell this carry with a forward contract, hedge-to-arrive contract, the direct sale of futures or (if he wants to keep the upside open), the purchase of put options. If you have storage capacity available, there are several advantages to selling the carry including (1) the opportunity to add the carry in the market to a good price captured in a pre-harvest sale (assuming you used an HTA, futures sale or the purchase of a put option and not a forward contract in pre-harvest pricing) and (2) the chance to hedge against any further lower prices while deferring delivery and tax issues to next year. If you are convinced of the market returning to price levels seen 5 months ago, selling the carry with a forward contract, HTA or futures is not the way to position yourself for a bull market. Only the purchase of put options – the right to sell futures – gives you upside potential. For the record, an at-the-money put on July soybean futures will cost $1 per bushel or more. Retaining the upside always comes at a cost.


Responses

  1. What do you think abou the carry charges in spring wheat? It has looked based on to arrive bids from trading companies that the market is inverted. Do you think it will cause the board to invert? If so does that mean that one should be using a tool such as selling defered months on the board and perhaps buying nearby calls to capture the inverse? Do you have any studies on spring wheat like you have posted for corn and beans?


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