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September 2, 2009
A "Frost Scare" In The Soybean Market? How Do You Take Advantage Of That?
Your soybeans may be a long way from maturity. And since you have flipped the calendar to September you wonder if they will mature enough to avoid a yield loss should an early frost take its toll. You may or may not have crop insurance protection. But you have a marketing opportunity, if you want to sell the frost scare.
The market wants #2 yellow soybeans, both in quality and quantity, but an early frost makes that a near impossibility, particularly if the crop is late in maturing. Iowa State economist Stephen Johnson says most soybeans will be in the R5 stage by mid-September, when beans begin to form in the upper pods, but they are not safe against a hard freeze until the R6 stage. That is when there are full sized green beans in the pods at the top of the plant. Even then some yield loss will be recorded.
Throughout the Cornbelt the average date of the first killing freeze ranges from early October in the north to late October in the south. However Johnson says the cool temperatures of this summer have little predictive value for estimating the date of the first frost. He says the hottest summer of the last 38 was in 1983 and the first killing frost that year was six days earlier than usual. The coolest year was 1992 and the first frost was 1 day early. While the cool weather of this year may cause one to think the frost would be early, Johnson says that has kept a premium on soybean futures.
Johnson says Nebraska farmer and soybean marketing specialist Roy Smith has identified a frost scare that typically occurs in late August or early September in the bean market. Of the last 30 years of the bean market, “Smith found that the single day for “selling a frost scare in soybeans” was 9-7, or the 7th trading day of September. This date typically falls just ahead of the USDA September Crop Production Report. In 2009, the September Report will be released on Friday morning, September 11th. Thus, the 10th could be a key date for implementing a pre-harvest sales strategy for soybeans.”
How do you sell the frost scare? Johnson says if you have adequate storage, selling November futures would be one tool. Another is to buy a November put option and if the US has a good crop and the South American crop gets off to a good start, then you have a floor in the market. Johnson says forward contracts with an elevator or processor will allow cash beans to be sold, but with a wide harvest basis, use a hedge to arrive contract that allows the basis to be set at a later date. He says the use of a January or March delivery date will allow the basis to return to normal, which may provide a better return to storage.
Farmers with Crop Revenue Coverage or Revenue Assurance with the harvest price option types of crop insurance will have a floor of $8.80 for soybeans. While those covered bushels can be sold with comfort, avoid selling uncovered bushels. Johnson says the use of other futures hedges or options strategies should be used for bushels that you do not want to commit for delivery.
Summary:
The lateness of the soybean crop in maturing may cause frost to be a consideration in the marketing of the crop. The market has a tendency to rise because of a frost scare in the early part of September, and usually before the September crop report, which this year is September 11. The use of either futures, options, or cash marketing contracts can be used, depending upon whether a marketer wants to commit delivery. If revenue crop insurance is applicable, those covered bushels can also be sold.
Posted by Stu Ellis at September 2, 2009 12:41 AM | Permalink
Comments
Thank you for the point of view. It provided food for thought. The table below may help in deciding the attractiveness of a frost rally for soybeans. It is based upon a Jo Daviess County IL farm. Our point of view is that the probability and amount of frost damage is needed to be known prior to a sale decision. That data is unavailable to us. So a range of possible outcomes are listed.
...........................................................................................Chance of Frost Damage
................................................................................................0%.....10%....25%...33%
Yield Reduction by Frost in Northern States................................5% $0.00 $0.07 $0.17 $0.23
.......................................................................................10% $0.00 $0.24 $0.60 $0.79
........................................................................................15% $0.00 $0.35 $0.88 $1.17
.........................................................................................20% $0.00 $0.48 $1.20 $1.58
If one thought there was a 25% chance of a frost and the yield reduction would be 15% or less, a $0.88 rally or more in price would just a sale. The $0.88 per bushel figure is the weight adjusted price increase that is expected should a frost occur that reduced northern states yield by 25%. (These are Zoodoo calculations, where the goal is to provide an answer no matter how wrong.) If one thought there is zero chance of a frost than any price increase would justify a sale.
Crop insurance in this incidence will only come into play in a marketing decision if: one is already expecting a loss, one’s yield has no or very low correlation to the US yield or ones management practices would place one at a higher risk of frost damage than your neighbors (later planting or planting later maturity beans etc.). Crop insurance is a good risk management tool but it is being overstated as a reason for marketing actions. A yield reduction of over 20% of the average expected yield is needed for the example farm to trigger any payment regardless of any price over $8.80 per bushel. (That percentage is based upon 85% RA. Lower coverage levels would require larger yield drops.)
The decision of when, how much and at what price one sell grain is dependent upon very individual situations. One needs to evaluate your situation prior to any action. The purpose here is to provide a tool that might provide additional insight.
Jib aka Gibberish
Posted by: Jib at September 2, 2009 11:22 AM
State/Freeze Date…Sept 25…Oct 2….Oct 9…Oct 16…Oct 23…Oct 30
IL........................63,500....33,500..15,000..6,000..1,500.....0
IN........................35,500....19,000..9,000...3,000...500......0
IA........................21,500.....9,500..4,000..1,000.....0.......0
MI........................11,000.....5,500..2,500..1,000.....0.......0
MN........................24,500....11,500..4,000..1,000.....0.......0
NE........................10,000.....3,500..1,000.....0......0.......0
ND.........................9,500.....3,500..1,000.....0......0.......0
SD........................11,500.....6,000..2,000....500.....0.......0
WI........................11,000.....5,500..2,500...1,000....0.......0
Sum......................198,000....97,500..41,000.13,500.2,000......0
%US Prod Loss.............6.1%...3.0%....1.3%...0.4%....0.1%..0%
US Bu/HA Reduction ........2.6.....1.3.....0.5....0.2....0.0..0.0
Helping Jib
The chart above is an estimated State and US soybean production loss (1,000 bushels) should a killing frost occur on the date noted at the top of the column. The process for calculation is similar to that presented by Purdue’s Ellsworth Christmas in a September 11, 1996 article; “Frost Risk of the 1996 Indiana Soybean Crop”. Saliba from Kansas State University is the source of freeze damage to soybeans. This data appears to be from 1982. (Should newer hybrid respond differently to a freeze than the studied plants the calculations above are incorrect.) The calculations are based upon days between reproductive stages of the soybeans. The average number was used in the chart above. The range of time for a soybean plant to move from one stage to another is somewhat large. This range could a source of a relatively large error in the figures presented above, especially if cool temperatures are part of the reason for the range of days. So as always there is more than enough room for large errors.
“Eyeballing” a normal fall freeze map with the data above, there appears to be a 50% chance of 76.5 million bushels damaged be a freeze, about a bushel per acre. (Interpolating from Jib’s comments above that would equate to a $0.70 per bushel price raise and a risk adjusted increase (weight adjusted price) of $0.45/bushel.) That is less than the average U of Illinois estimated soybeans yield increase over the September WASDE of 2.6 bushels per acre. So again production increases may out pace potential freeze damage. Smith and Johnson in the issue above seem to be right in their assessment of soybean price (frost) rallies.
Posted by: Freeport, IL at September 17, 2009 12:00 AM
Our estimated frost losses for soybeans now appear to be way off. Using the October 5, 2009 crop progress numbers it now appears the maximum loss from the forecasted October 10-11, 2009 frost will be 5.4 million bushels for the seven states (MN, NE, ND, SD, WI, IL only NE, NW & W Districts included and IA SE District excluded). The soybean crop moved through their development stage much quicker than projected which appears to be the source for the error. That quick progress to maturity, may sometime in the future, appear as lower yields because less time was used to accumulate dry matter in the bean. Anyway we missed the frost projection.
Posted by: Freeport,IL at October 8, 2009 1:56 PM
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