Risk management | September 2014 soybean futures price of $12 still profitable, says analyst
Farmers who are having trouble moving crops this fall might not want to worry about hedging it right away.
However, a brokerage firm is urging its clients to protect some 2014-15 prices now.
“Start considering it. That’s the point of disciplined, consistent risk management,” said David Derwin, a senior marketing adviser with P.I. Financial in Winnipeg.
“Go through the process and see where things are at and discuss it, so that you’re not surprised in two or three months if things move in a big way.”
Derwin said new crop futures prices are profitable, even if they are lower than many farmers like.
He said farmers shouldn’t dismiss the idea of protecting a September 2014 soybean futures price of almost $12.
“That’s not such a bad price.”
He said farmers don’t need to hedge much of their expected 2014-15 crop now, but they shouldn’t leave it all unhedged either. Using options is the safest way to lock in a basement price without taking on risk.
Buying put options is the simplest price protection strategy, and it’s one that P.I. is recommending. It will cost about 75 cents per bushel to pay the premium if farmers want to guarantee a minimum futures price at the present forward futures soybean value.
However, the premium drops to about 50 cents per bu. if farmers are willing to protect a price about 75 cents lower than the present year-out futures price.
That will protect a price of around $11 per bu., which Derwin said is sufficient to guarantee a bit of profitability without being too expensive.
Other strategies can also cheapen the effective premium cost, such as writing an out-of-the-money call against the same underlying amount of grain that is being protected by the put.
Derwin said many of his firm’s clients were keen to hedge a year-out at this time last year because prices were still high.
“We could buy (wheat put) options up at $8 a bu. That was easy to do,” said Derwin.
“It was a lot easier at this time last year.”
However, the overall trend of grain markets is for lower prices, so there is more reason now to consider protecting year-ahead prices. Profits are still on the table.
“It’s fairly well priced right now,” said Derwin.