Gerloff, who spoke today at the Southern Region Agricultural Outlook Conference in Atlanta, says the one constant soybean growers can count on is that soybean prices will continue to be volatile.
On one hand, a continued weaker dollar relative to other foreign currencies will help support U.S. soybean prices, he notes. However, a stronger dollar in combination with larger South American production could put U.S. soybean prices in danger of falling significantly.
“For U.S. prices to continue at their current level, current U.S. yield projections must be at or below the 36.4 bushels per acre projection made by USDA in September. And, in light of ever-increasing production from South America, exports must continue strong, with China an important component of the U.S. export market,” he says.
With November futures hitting above the $6.50 mark on Sept. 22 after news of both positive demand and negative yield projections, the bull market’s upside potential depends on domestic and foreign production, in addition to export numbers.
Supporting near-term prices are lower U.S. yields and continued Chinese import activity. “On a positive note, Chinese soybean imports have increased substantially over the past 10 years,” Gerloff says. “We’re moving lots of beans to China, and that’s supporting our price.”
In addition, he says, U.S. ending stocks dropped to an estimated 140 million bushels at the end of the 2002 marketing year (August-July), compared to 365 million bushels in 1998. While production dropped moderately in 2002, expanded crush and export markets have also helped to reduce ending stocks.
“Beginning the 2003/2004 marketing year with relatively low stocks puts even more emphasis on the 2003 crop still in the field. With late season weather problems, yield projections for the 2003 crop have dropped over 3 bushels per acre since August, and October’s crop report may drop yields further,” Gerloff says.
“The stage seems set for support at these high prices, and even more volatile prices in the upcoming year.”
Standing in the way is potential negative price pressure that could come from any increase over current projections in South American soybean production. Unless weather or disease drops average yields significantly in 2004, South American soybean production should increase 5 percent to 6 percent, and Gerloff says that number could be as high as 10 percent.
From a strictly competitive standpoint, South American production has to affect the soybean prices U.S. growers can get from the market, Gerloff says. “There’s still some production risk in this market.”
As a matter of history, he says, USDA’s September production report usually overestimates U.S. ending stocks and underestimates both ending stocks and production for Argentina and Brazil. “Hopefully, we’ve got a better handle on those numbers this year.”
Believing the current price of soybeans is “fragile,” Gerloff recommends that producers take advantage of pricing opportunities.
“In the current market environment, I would be selling soybeans if I were a producer,” he says. “At $6.50 per bushel, the market is expecting domestic production of about 35 bushels per acre in the October USDA report. I don’t believe soybean prices will change substantially if production estimates were to drop to that level.
“The bigger market moving news is what will happen in South America.”
Gerloff suggests growers contracting at current prices buy call options to limit their price risk this fall. For those producers who want to hold soybeans in storage for now, he recommends buying March or May 2004 put options to limit downside price risk.
In-the-money options generally net more profit than at-the-money, or out-of-the-money options, according to Gerloff. “I’m looking at spending a little bit more money to capture that increased level of price protection,” he says.
An in-the-money option defines a strike price where there is intrinsic value to the option. For example, an in-the-money put option is one in which the strike price is above the underlying futures price for that trading month.
If the November Futures price for soybeans is $6.50, an at-the-money put option would have a strike price of $6.50, an in-the-money put option would have a strike price greater than $6.50, and an out-of-the-money put option would have a strike price below $6.50.