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Todd's Take
Tuesday, May 19, 2015 8:15AM CDT

By Todd Hultman
DTN Analyst

So far in 2015, the news for soybeans has been consistently bearish and prices have been sliding lower. Last week, soybeans took two more bearish hits after USDA estimated 500 million bushels of U.S. ending stocks for 2015-16 and Informa Economics followed with a larger planting estimate of 87.2 million acres.

Last week's news came on the heels of this year's record soybean crops from Brazil and Argentina. If all that were not bearish enough, most growing areas across the central U.S. have received plenty of rain since April, a good start for soybeans that were 45% planted, USDA reported Monday. If we were making a movie, it would be hard to write a more bearish script than what we have seen this year.

As of Monday, January 2016 soybeans are down 67 1/2 cents in 2015, at $9.42 1/4. Fifty-eight cents of the decline came in the month of January as Brazil received beneficial rain. Since then, prices have held roughly steady, thanks to active commercial support on the demand side of the market. Guessing where prices go from here is a tough call and, so far, forecasts are bearish with El Nino expected to keep summer weather mild.

According to USDA, producers with estimated land expense of $158 an acre needed $9.95 a bushel to break even in 2014 and the early breakeven estimate for 2015 is $10.66 a bushel.* A quick survey of northwest Iowa and central Illinois shows that cash new-crop bids have not been high enough yet to profitably forward contract soybeans in 2015; this is a tough situation for producers who would like to minimize the price risk of this year's crop.

Given the lack of good marketing choices, this may be a good year for producers to consider the benefits of out-of-the-money put options. As an example, the January $8.20 soybean put closed under 12 cents on Tuesday.

Many will groan at the thought of buying a put with a strike price as low as $8.20 and I admit that this is a mediocre idea in a year of limited choices. After all, crop insurance offers better protection and, for many renting ground, the $8.08 floor that the put provides will not guarantee a profit. The $8.20 put also has a good chance of expiring worthless on Christmas Eve and is not suitable for everyone. So why bother?

The best argument for buying a soybean put is that it offers flexible protection from a large decline in soybean prices. Somewhat like high deductible auto insurance, you hope you never need it, but are glad to have it, if you do.

If soybean prices go higher, producers can still benefit from a higher cash price at harvest time. If, however, this year's good weather overwhelms demand and prices go far enough south, you will not have to wait until harvest to benefit from a rise in the put's value. An out-of-the-money put will not give 100% protection in the case of falling prices, but it can help to supplement the protective benefits of crop insurance.

As I mentioned in the Feb. 23 article, "Soybeans are Looking Up," the expected range for January soybean prices in 2015, based on their production cost, is $8 to $12 a bushel. Unfortunately, there is no guarantee that prices can't go lower, especially with this year's early talk of ending stocks above 500 million bushels, increased plantings, and El Nino keeping the weather mild. Given the wide range of uncertainty ahead for soybean prices in 2015, some extra price insurance may be in order.

(This article is intended to be educational and is not a specific recommendation for purchasing out-of-the-money options, many of which expire worthless. Consult with your financial advisor to find the best risk management choices for you.)

* USDA Commodity Costs and Returns at: http://1.usa.gov/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1


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