Automatically Take Advantage of Seasonality
Tight world soybean supplies, strong global demand and geopolitical tensions have pushed soybean prices to near historical highs in early 2022 (Chart 1). This creates opportunities for soybean producers to forward price this year’s crop at profitable levels.
Chart 1 – Historical cash soybean price
But when to sell? That’s always the question, and it can be a stressful decision but it doesn’t have to be if you put a plan in place. To put this decision on auto-pilot, producers can utilize the ADM Average Seasonal Price (ASP) contract, which automatically forward prices a percentage of expected production during a seasonally strong time of year.
By taking advantage of an ASP contract, you benefit from:
- Diversifying your grain marketing portfolio
- Leveraging an automatic execution component in your grain pricing program
- Capturing seasonal price advantages, rather than reactively selling on emotion
- Maintaining the control to “price out” if you see prices trending lower
The primary objective of any grain marketing strategy should be to protect and enhance farm profitability. Including ASP contracts in a soybean marketing program has delivered a strong return on investment (ROI) over time, providing a challenging benchmark for other marketing alternatives in the mix.
Long-term seasonal trend
While past performance is no guarantee of future returns, an analysis of two extended time periods may prove instructive.
Ed Usset, Grain Marketing Economist with the University of Minnesota and a primary contributor to the ADM Shift program, has studied seasonality in the markets for years. His analysis of soybean prices from 2000-2021 shows that the market was higher on May 1 than on October 1 in 13 of 22 years. On average, prices fell 26-cents/bushel during this period.
While that’s not a stellar return, Usset said the forward pricing strategy is stronger when certain years are excluded. He advises producers to forego forward contracting when the price is less than the cost of production. This happened in four of the years studied – 2001, 2002, 2019 and 2020. “Take them out of the equation. I wouldn’t be active in those years,” he emphasized.
When those years are removed, the average price achieved by selling in May instead of October was 49-cents/bushel higher.
Reviewing the ASP results
While Usset’s strategy focuses on selling on May 1, the ASP averaging pricing period begins May 23 and continues to August 5.
From 2012-2021, the average annual return for the ASP contract compared to the harvest price is 27-cents/bushel (Table 3). This result correlates with Usset’s longer-term strategy. It simply means that by sticking to this strategy consistently over the years, a producer would have gained an average of 27-cents in the futures component of the price vs selling at harvest.
Table 3: 10-year-average soybean ASP results
However, further analysis shows how removing the two years when prices were below cost of production alters the average price. When 2019 and 2020 are removed, the average annual gain rises to 57-cents/bushel.
Know your breakeven
When new-crop prices are unprofitable on May 1, Ed Usset recommends waiting to price soybeans rather than selling ahead. ASP 10-year-average results show a 57-cent/bushel gain vs selling at harvest excluding two unprofitable years. This compares to a 27-cent gain when all years are included.
Table 4: 10-year-average soybean ASP results, excluding two unprofitable years
An old market adage says, “The cure to high prices is high prices.” This means that high prices tend to create more supply as producers switch acres or find more acres for soybeans. In addition, high prices can dampen demand.
This year’s soybean planted acreage can still be influenced by several factors, but trade estimates currently expect 2 million more acres than a year ago. It’s also possible that a record amount of double-crop soybeans will be planted to take advantage of high prices. With good weather and higher acres, it’s likely that supply will increase and pressure prices.
Still, no one knows whether soybean prices will fall in 2022. But past price spikes were followed by a rapid return to lower prices at harvest, including 2014 and last year (Chart 1). During these years, the ASP contract dramatically exceeded the harvest price, by $1.94/bushel and $1.32/bushel respectively.
With soybean futures currently near the top end of their historical range and with the prospect of higher acreage contributing to supplies, it’s important to have a plan to protect and capture this price strength. This is especially true given the expense side of the equation since input costs have risen significantly.
Producers can use an ASP contract to spread sales over months of uncertainty related to new-crop supply when prices tend to build in seasonal premiums to compensate for crop production threats. The contract allows sales over the entire period from May 23-August 5 to determine a final price. But it also gives producers the flexibility to end the selling period early by pricing out of the contract at their discretion at no cost. For example, should market conditions deteriorate, a producer may decide to avoid potential further declines by capturing the average price to that point.
As with any forward pricing tool, ASP contracts should be used alongside soybean marketing best practices to determine how much of the crop to price ahead. Some of these include:
- Know the breakeven to understand profit levels and don’t forward contract at a price below the cost of production.
- Market up to the amount of insurance coverage with a diversified contracting approach.
- Assess bushels produced over the amount of insured coverage as the crop year goes on. They can be priced ahead of harvest once the crop is made or held to be priced after harvest.
Make sure to register for the ADM Shift program for more detail on these grain marketing principles and others.
ASP contracts for soybeans require a 5-cent per bushel investment, and the deadline to enroll is May 13, 2022. Contact your ADM representative to enroll a portion of your expected production in a contract that works best for your operation and marketing objectives.
10-year-average (2012-2021) = 5-cent investment, 27-cent average annual return = 22-cent/acre profit
Excluding years when price was below cost of production = 5-cent investment, 57-cent average annual return = 53-cent/acre profit
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