Posted by: usset001 | June 26, 2009

The 11th Commandment of Grain Marketing and soybeans

soybeanfieldAs we slide into the final week of June, I think it is a good time to review the 11th Commandment of grain marketing, “Thou shall not hold unpriced corn or soybeans in storage after July 1.” The 11th Commandment also applies to spring wheat, but I would move the date up to June 1.

Two powerful forces come into play in grain markets during the summer months. One force is a strong seasonal tendency for futures prices to trend lower from spring to harvest. The other force is basis, which also generally declines from summer to harvest.

To illustrate the importance of basis in the 11th Commandment, let’s focus our attention on the current situation in soybeans. The stocks situation in soybeans is tight, and the tightness is reflected in an inverted futures market. The old crop Jul’09 contract is trading at a $2 premium to the new crop Nov’09 contract. The nearby soybean basis in Southern Minnesota is about 55 cents under the Jul’09 contract – or $1.50 over the Nov’09 contract. In about 3 months, when soybean harvest is in full swing, the nearby basis will be about 50 cents under the Nov’09 contract.

Do you still have unpriced soybeans in storage? Are you ready for a $2 decline in the November soybean basis over the next 14 weeks?

It is, of course, possible that the nearby basis and futures markets will trend even higher over the next few weeks, only to be followed by an even sharper decline into harvest. But you are dancing very close to the flame with unpriced bushels.

Do you recall what happened in July of 2004? Cash soybean prices declined from over $9 per bushel in the beginning of the month to less than $6 by the end of the month. Do you recall what happened just last year? Soybean prices were over $15 per bushel in the beginning of July and ended the month at about $13 (on its way to $8 at harvest).

I want no sinners in grain marketing this year!


Responses

  1. If one wants to own beans you can own a lot of paper for the 2.00 basis swing that we are going to see……………..if you did it via options you could get 2 for 1 (on both sides) or maybe more on both sides….doing bear put spreads or bull call spreads


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