Category: Crop Marketing

As harvest continues to progress, farmers face the decision to sell or store soybeans. If soybeans are stored, farmers should evaluate the risks and rewards of holding soybeans priced or unpriced. Consideration should be given to both futures price risk and basis risk for individual locations. Holding soybeans in storage with no price protection is risky, as the value of the crop in storage has the potential to decline in value, while also incurring storage costs, such as interest. USDA projects Brazil’s soybean production to be a record crop of 6.2 billion bushels, up 10% compared to last year (USDA September 2024 WASDE). Brazil’s soybean planting season runs from September through December, with harvest occurring from January through May (USDA, FAS). As such, the price of U.S. soybeans held in storage will be strongly influenced by production risk during the growing season in South America. 

Figure 1. Three soybean pricing scenarios in Memphis, TN as of Oct 3, 2024 

This article examines three scenarios for pricing soybeans this fall.

1. Sell soybeans at the current cash price;
2. Store soybeans and establish a cash forward contract price for delivery in February; and
3. Buy a put option and sell a call option to fence in a futures price with delivery of soybeans to a cash market in February.

All futures market prices, premiums, and cash prices are for Memphis, Tennessee, as of October 3, 2024. Interest is assumed at an 8% rate.

In scenario one, the cash price was $10.21 (November Futures contract $10.46; negative basis of $0.25). This is the most straight forward scenario. The farmer sells soybeans and receives $10.21 (solid black line in Figure 1).

In scenario two, the farmer decides to store soybeans but wants to establish a price, so he enters a cash forward contract for delivery in February for $10.91. The interest cost to carry soybeans for four months is estimated at $0.27 ($10.21 x 8% x (4 months / 12 months)). Once delivered, the farmer receives $10.64 ($10.91 less $0.27 of interest expense; dashed black line in Figure 1). 

In scenario three, the farmer stores soybeans for February delivery and buys a $9.80 March put option for $0.13 and sells a $12.00 March call option for $0.13, making the strategy premium neutral, without including transaction costs. This strategy has fenced in a futures price (does not include basis) between $9.53 and $11.73 (solid red line in Figure 1). Change in the March futures contract will determine the outcome. Positions in the futures market would be offset by cash sales. If March futures are below $9.80, assuming 0 basis, the producer will receive $9.53 ($9.80 less $0.27 in interest). For March futures prices below $9.80, the put option would be exercised, establishing a short position in the futures market for the farmer. If March futures are above $12.00, the producer will receive $11.73 ($12.00 less $0.27 in interest). For March futures prices above $12.00, the call option would be exercised, establishing a long position in the futures market for the farmer.  March futures prices between $9.80 and $12.00 will result in cash prices between $9.53 and $11.73. March futures prices above $10.48 would provide a net price greater than the cash sale in scenario 1, and a March futures price above $10.91 would provide a cash price greater than the storage with a cash forward contract in scenario 2. An additional benefit of the options strategy is that the farmer can set basis immediately or any time prior to delivery of the soybeans to the cash market. The dotted red lines in figure 1 show how a positive or negative $0.25 basis would affect the cash price received under the fenced in futures price scenario. 

All three alternatives have advantages and disadvantages. Farmers need to determine their access to storage, price risk tolerance, and expectations for futures prices and basis for their market to evaluate which strategy is right for their operation.

References

Barchart.com. Soybean Futures and Options Prices and Premiums. https://www.barchart.com/futures/quotes/ZS*0/futures-prices?viewName=main

USDA Foreign Agricultural Service. Country Summary. Brazil Soybean Area, Yield and Production. https://ipad.fas.usda.gov/countrysummary/Default.aspx?id=BR&crop=SoybeanUSDAUSDA September 2024 WASDE Report. https://www.usda.gov/oce/commodity/wasde

As soybean prices for U.S. producers deteriorate, they face fierce competition from greater Brazilian production in the export market. USDA-WASDE projects the 2024/25 average farm price to be down $3.40 from two years ago, at $10.80 per bushel. U.S. soybeans rely heavily on the export market; on average, 47% of U.S. soybeans were exported in the previous five years. For over a decade, Brazil has maintained its position as the world’s largest soybean exporter, and in recent years, it has further expanded its global market share (Figure 1). USDA-WASDE projections for the 2024/25 marketing year estimate Brazil will account for 58% of global soybean exports, with the United States trailing at 28%. The remaining 14% will come from other exporting nations. While Brazil’s share has dipped slightly from last year’s peak of 59%, it continues to dominate the global soybean export market. 

The U.S. soybean market is facing challenges with Brazil strengthening its position as China’s primary supplier. China has been working to become less dependent on U.S. soybean purchases, and increased production has allowed Brazil to become the preferred trading partner. According to the Foreign Agricultural Service’s Beijing post, in the first nine months of the 23/24 marketing year, the U.S. accounted for 26 percent of China’s soybean imports, compared to 69 percent from Brazil. Reports also indicate that China is dealing with an oversupply of soybeans, as recent high purchases come during subdued feed demand. This fact has hampered sales to China as we enter the peak marketing season for U.S. soybeans. While U.S. sales to China have risen recently, they are still trailing behind last year’s sales and the five-year average. As of the week ending 9/19/24, the total soybean commitments to China totaled 6.8 million metric tons, compared to 7.4 million for the same time last year and the five-year average of 10.6 million.  

                  The export outlook for U.S. soybeans is further complicated by the prospect of low river levels on the Mississippi River, a concern highlighted in last week’s article “Low River Levels on the Mississippi River: Not the Three-peat We Want” (southernagtoday.org). Recent rainfall from Hurricane Helene has improved the river situation, as the Mississippi River at Memphis is expected to rise above the low river threshold. Without a positive shift in the current export scenario, U.S. producers face lower prices as they harvest a record soybean crop. With Brazil now dominating the export market, the potential for price increases this year depends heavily on the progress of Brazil’s soybean planting season. Although Brazil has just entered its planting window, dry conditions in the central region could lead to delays. If drought conditions develop, it could create an opportunity for higher prices for U.S. producers. Current forecasts call for rain over the next couple of weeks, but rainfall remains below normal.  

Figure 1. Share of Global Soybean Exports by Country, 2010-2025

References 

United States Department of Agriculture, Foreign Agricultural Service. Oilseeds and Products Update: Beijing, China – People’s Republic of China. CH2024-0116, 2024, https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReportByFileName?fileName=Oilseeds%20and%20Products%20Update_Beijing_China%20-%20People%27s%20Republic%20of_CH2024-0116.

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Maples, William E. “Brazil Expected to Continue Dominance of Global Soybean Exports.” Southern Ag Today 4(40.3). October 2, 2024. Permalink

The Mississippi River level measured at Memphis, TN, has dropped to severe low levels for the third year in a row. As of 11:35 AM on September 23, 2024, the river level fell to -10 feet. In the past ten years, the Mississippi River has fallen below the established zero level^[1] during harvest (i.e., August 1 through November 30) seven times. However, the level has only fallen to the “low” stage – defined by the National Weather Service as -5 feet – four times (2015, 2017, 2022, and 2023). The river level has serious implications for cash basis, or the local cash price offered by a grain elevator less the futures price traded on a global market.

Barge freight rates are established by the U.S. Inland Waterway System using a percent of tariff system. Benchmark rates are based on the tariff rates from the Bulk Grain and Grain Products Freight Tariff No. 7, entered into in 1976 between the U.S. Department of Justice and Interstate Commerce Commission (USDA-AMS, 2024).  While these rates are no longer directly applicable, they are still used to calculate the percent of tariff.  Calculating the percent of tariff consists of dividing today’s tariff rate by the 1976 tariff rate. The 3-year average percent of tariff rates indicates the weekly barge freight rate tends to be near 360 percent of tariffs, or about $11.23/ton^[2] (USDA-AMS, 2024). Low Mississippi River levels have a negative effect on corn and soybean basis through the barge freight rate (Figure 1). For example, the week of September 26, 2023, the barge freight rate was 1,689 percent of tariff, or $53.03/ton, which means the cost to transport grain from Cairo, IL, or Memphis, TN, to the port of New Orleans was four times higher than the three-year average for the same week. 

Figure 1. The relationship between the Mississippi River level and barge freight rates for moving cargo from Cairo, IL or Memphis, TN 

Figure 1 plots the Mississippi River level measured at Memphis, TN, for the period August 1, 2023, through September 3, 2024. This figure also provides the weekly average freight, as well as the expected barge freight rate measured by the non-drought three-year average freight rate (i.e., 2019-2021). As the gage height falls, barge freight rates increase, and vice versa.

The relationship between the futures price and the price at local cash markets can change abruptly due to economic or environmental events, such as low river levels. Local cash bids offered by elevators on the Mississippi River tend to be influenced by river level in periods of drought, because it is more expensive to ship the same amount of grain in more loads due to reduced barge draft (Biram, et al., 2022; Biram, 2023; Gardner, Biram, and Mitchell, 2023). Figure 2 shows the soybean basis response to low river levels in Helena, AR, in 2022 and 2023 with another downward trajectory for 2024 as of September 20, 2024.

Figure 2. Daily Soybean Basis at Helena, AR in Harvest Window

Figure 2 shows the historical daily basis for soybeans during the months of July through November. The blue, orange, purple, and green lines denote the 2021, 2022, 2023, and 2024 crop years, respectively. The solid red line denotes the non-drought five-year average basis for a grain elevator in Helena, AR. The non-drought five-year-average provides the “normal,” or “expected,” basis. The dashed vertical line denotes the basis most recently reported (-26) on September 10, 2024, which is 5 cents below the five-year-average basis of -31 cents.

While it may appear that the current basis in the heart of the Midsouth Delta region is similar to the non-drought five-year-average, this should be interpreted with caution. Upon closer inspection, the 2022 crop year also saw relatively strong basis at this time, but a steep decline followed. The relatively strong basis in the first week of September is likely due to only 30% of the midsouth soybean crop being harvested with the remaining occurring by mid-November, along with recent rains, including those from Hurricane Francine. 

A potential option farmers might have is to store grain in the bin and market grain in the post-harvest window as described at length in previous Southern Ag Today articles (Gardner, 2023; Gardner and Maples, 2023; Gardner, 2024). Historically, futures and basis tend to recover in the months when there is little domestic production to buy and stocks are drawn down. We note that the USDA Marketing Assistance Loan (MAL) program may be an additional tool to add to a post-harvest marketing strategy. A benefit to using MALs is the offered interest rates are below the market average saving potential interest expense. Since grain sitting in the bin is not paying off the operating loan taken at the beginning of the crop year, interest accrues on the operating loan, creating the opportunity cost of storage in addition to the explicit costs of handling and drying (Gardner, 2023; Smith, 2024).

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^[1] According to the National Weather Service, silt may deposit in a river channel filling it up, or the channel may be washed deeper due to strong currents. Establishing a gauge zero level maintains consistency in river level measurements over time (National Weather Service, 2024).

^[2] This figure is found by multiplying the percent of tariff, which in this example is 3.60, by the benchmark rate for the Cairo-Memphis ports which is $3.14.

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References

Biram, Hunter, John Anderson, Scott Stiles, and Andrew McKenzie. “Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis“. Southern Ag Today 2(45.1). October 31, 2022. Permalink

Biram, Hunter. “Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth.” Southern Ag Today 3(21.1). May 22, 2023. Permalink

Gardner, Grant, Hunter Biram, and James Mitchell. “Low River Levels, Barge Freight, and Widening Basis.” Southern Ag Today 3(39.1). September 25, 2023. Permalink

Gardner, Grant. “Interest Rates and Grain Storage.” Southern Ag Today 3(26.1). June 26, 2023. Permalink

Gardner, Grant. “To Store or Not to Store? Old Crop Exit Strategies.” Southern Ag Today 4(35.1). August 26, 2024. Permalink

Gardner, Grant, and William E. Maples. “River Levels and Off-Farm Storage Disbursement.” Southern Ag Today 3(43.1). October 23, 2023. Permalink

National Weather Service. “How can a river stage be negative?” National Oceanic and Atmospheric Administration, National Weather Service. Accessed September 16, 2024. Permalink

Smith, Aaron. “Storing corn or soybeans: what is the futures market incentivizing?” Southern Ag Today 4(33.1). August 12, 2024. PermalinkUSDA-AMS. 2024.  Grain Transportation Repots. Available at: https://www.ams.usda.gov/services/transportation-analysis/gtr

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Biram, Hunter, James L. Mitchell, and H. Scott Stiles. “Low Rivers Levels on the Mississippi River: Not the Three-Peat We Want.” Southern Ag Today 4(39.3). September 25, 2024. Permalink

The September World Agricultural Supply and Demand Estimates (WASDE) report indicates modest changes in supply and demand for corn and soybeans. The World Agricultural Outlook Board (WAOB) increased their estimated corn yield by 0.5 bushels per acre, offset by a decrease in carryover from the 2023 marketing year. Soybean demand also saw a slight increase of 2 million bushels. Both cotton and rice yields were cut; however, the lower yield expectations were offset by lower demand, resulting in no change to the projected season-average price.

The remainder of this article focuses on corn and soybeans, which exceed trend yields by 2.6 and 1.2 bushels and represent a national high. Record yield expectations are driving stocks-to-use ratios (a key indicator of surplus) to levels much higher than in recent years. Consequently, the USDA has projected the marketing year average price for corn to be around $4.10 per bushel, while soybeans are expected to average $10.80 per bushel.

Currently, domestic consumption and exports of corn and soybeans appear to be stable. Crush (processing) and ethanol production are at or near record highs, while export demand is lower, but somewhat steady. Without a significant change in the yield estimate due to drought or overestimation, it is hard to envision a sharp price rise for the 2024/25 marketing year.

Figure 1 graphs stocks-to-use ratios and CPI- (inflation) adjusted season average prices for corn and soybeans with the September WASDE Estimates and associated trendlines (green and yellow with gray confidence intervals). CPI-adjusted corn prices are at their lowest level since at least 2011, and soybeans are nearing the lows seen in 2019. As a result, 2024 may be one of the toughest years for grain producers in the past decade, given the absence of a major event that could drive substantial price increases.

Figure 1: CPI Adjusted Price and Stocks to Use Ratio for Corn and Soybeans

Sources:

U.S. Department of Agriculture, World Agricultural Outlook Board. (2024, September 13). World Agricultural Supply and Demand Estimates (WASDE). https://www.usda.gov/oce/commodity/wasde

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Gardner, Grant. “Minimal Price Gains Amid Record Yields: A Tough Outlook for Grain Producers in 2024.” Southern Ag Today 4(38.3). September 18, 2024. Permalink

The USDA is currently forecasting a record national average corn yield of 183.1 bushels per acre for 2024 (Figure 1). Record yield and flat demand have contributed to projected ending stocks of over 2 billion bushels, pushing December corn futures contract prices from $4.80/bu in May to a low of $3.85/bu at the end of August. Additionally, record yields across many regions will provide a weaker than typical basis for many corn producers. USDA will continue to modify yield estimates as additional harvest data are collected this fall and winter. The USDA’s final yield estimate will be provided in January 2025. This article examines national corn yields and changes in percent yield deviation from a trendline over time.

Figure 1. U.S. corn average yield, linear trendline yield, and percent deviation from trendline, 1945-2024

Since 1945, U.S. national average corn yield has increased an average of 1.9 bushels per acre per year, or 19 bushels every 10 years. Drought is typically responsible for substantial negative deviations from the trendline (-25% in 1988 and -22.5% in 2012; Figure 1). Severe widespread droughts will continue to negatively impact national average corn yields in the future, presenting as large deviations from a long term trendline. However, there are patterns that emerge in the yield deviation from trendline data. There is a tendency to have multiple years of deviation above trend (2003-2009 and 2014-2018) or below trend (1995-1997 and 2010-2013). The number of years differs, and can contain a contradictory year, but there is a pattern. This is not to say that the current yield indicates that for the next few years yields will be above trendline. The second is there is a smaller percent deviation (positive or negative) from trendline in recent decades. From 1965-1994, U.S. corn yields deviated (+ or -) from trendline by more than 10% in 11 years and by more than 7.5% in 20 out of 30 years (Table 1). By contrast, from 1995-2024, yields deviated by greater than 7.5% in only 3 years. The average percent deviation from trendline from 1995-2024 was 3.7% compared to 9.4% from 1965-1994. Thus, with the exception of a few extreme years, yield in the past 30 years has been following a long term trendline. National average yield impacts the prices producers receive. Understanding long term national, state, and regional yield trends and patterns can assist in formulating a risk management and marketing strategy. 

Table 1. The number of years from 1965-1994 and 1995-2024 with national corn yields 10%, 7.5%, 5%, or 2.5% higher or lower than the linear trendline

References

USDA NASS National Corn Yield Data. NASS Quick Stats. https://www.nass.usda.gov/Quick_Stats/

USDA August WASDE Report. https://www.usda.gov/oce/commodity/wasde

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Smith, Aaron. “National Corn Yields and Deviation from Trendline Over Time.” Southern Ag Today 4(37.1). September 9, 2024. Permalink