The market is expecting a large switch on acreage from corn to soybeans, but how much is anyone’s guess. In each of the following scenario, we are factoring corn to be steady to down $0.30/bu. at $3.50 Futures. Soybeans could see a potential drop of $0.50-$1.50, so we’ll focus on the extreme low at $8.20 Futures.
Here is sample operation: A row crop farm is producing 1,100 acres of corn and 720 acres of soybeans, a typical two-thirds corn one-third bean split, with a breakeven for corn and soybeans at $3.45 and $8.75, respectively.
The GrainBridge Matrix demonstrates what this operation looks like if soybean acres increase beyond the 88 million projection and 50% of soybeans are sold for $9.50 cash to-date, a conservative to aggressive marketing approach. Additionally, there is 80% Revenue Protection. At average yields of 53 bushel per acre, there is a small profit of $17 per acre, even if prices fall to $8.21 Futures.
Now, look at this operation if soybeans get the 88 million plus acres, and in addition to being sold 50% soybeans for $9.50 cash, the producer also has 50% protection with a 10.00 Nov 17 PUT option for approximately $0.65 as of March 20. This provides protection at the current break-even level of $8.75 cash, calculated by a 10.00 put – 0.65 cost of put = $9.35. Taking into account local basis, at -0.60, the cash price equates to $8.75. Adding a simple put strategy to the mix provides some downside protection on the unsold and uninsured bushels. At harvest and expiration of the put option, there could be considerable value.
There are obviously multiple scenarios that can take place and the outcome of each operation is different. Take time to run your own scenarios to help understand your potential risk exposure. Other questions and factors you might consider include:
- What if I sell more aggressively against my crop insurance guarantee of 80%?
- What if the acreage shift isn’t as dramatic as some think? What if it’s only a couple million acres?
- What if I have NO beans sold to date?
- What if the market has an 88 million acre bean crop factored in already?