Consider soy hedge in down market

Put option | The potential for soybean prices to fall this winter makes this marketing strategy an option

It’s hard to go back in time and hedge canola against the collapse that’s occurred since harvest.


However, one adviser is using a strategy that might cover some of the recent losses, if it works out.


“The last man standing now is soybeans,” said Errol Anderson of Pro Market Communications.“We’ve moved away from canola puts.”


Anderson is buying soybean put options in the hope that soybean prices fall and come closer to the performance of canola in the past few months.


If all the vegetable oil crops fall in value, growers will receive some coverage from the soybean put options as long as they roughly mirror canola performance.


However, Anderson expects soybeans to fall much more than canola in coming months because soybeans have been strong recently.


Massive Chinese buying and low soybean meal stocks in the central United States have allowed U.S. soybean prices to retain their price much better than other crops, most of which have fallen significantly since harvest. 


Soybeans futures are up slightly from where they were in October and within the range of trading in November, while canola futures have fallen more than $1 per bushel. Canola’s cash price has fallen close to $2 per bushel because of the widening basis.


Soybean futures have also diverged sharply from corn futures, which have fallen 10 percent since the end of September. It makes soybean futures almost exactly three times the price of corn, which is a vast spread compared to the usual relationship of 2.2 times.


Anderson has often used soybean oil options to hedge canola because soy oil closely tracks canola prices and is more liquid than canola options. 


By shifting his strategy to soybeans Anderson is speculating that soybean prices can’t remain this high for long and that they’ll likely return to a closer relationship with canola and corn.


“The corn-soybean relationship is really out of whack and has to correct somewhere,” said Anderson.


A potential trigger for lower soybean prices would be if the weather in South America continues favourable for crop development and farmers there harvest a record crop. 


Anderson thinks canola prices are probably now in the bottoming process, so there might not be too much remaining downside. However, soybeans have a long way to fall.

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