The old timers always said “beans don't like wet feet.” This is because beans are susceptible to diseases like bacterial blight, pod and stem blight, downy mildew, phytophthora rot, sclerotinia stem rot, sudden death syndrome and a myriad of others. These diseases also can cause enough plant stress to allow all other fungus related diseases to attack. While beans don’t like wet feet, they don’t like dry limbs for that matter either. It is well known that the critical weather time for soybeans is August when bean pods are setting and filling.
Dry or excessively hot weather can cause pre-mature death; or pods could abort, which allows the plant to send its remaining energy to fewer pods for successful seed production. Additionally, when a year starts wet and ends dry such as we have seen this year, plants are very susceptible to insect damage like Japanese beetles and aphids. And this year has been a record year for crop dusters as the insect battle has been raging in the western corn belt. When we survey fields, we can estimate a crop of 65 bushels where the plant is green. But it is impossible to adjust the yield to accurately reflect areas in a field like the one depicted above. Thus on the one hand we have the old money fundamentalists, who have been around plant genetics for a lifetime, warning that the 2008 crop could be a yield disappointment. The old money is telling us that if we want to make a truck load of money, to buy the market; that’s how they got all that old money. But on the other hand, the “new” money technicians are selling based on the average directional index, the money flow index, on balance volume and MACD as well as the “macro-economic liquidation” that is taking place in the market.
The real question is how can this new money ignore the picture below and sell off? Consider this: if yields are reduced by a mere two bushels per acre, or 5% — the field pictured has probably lost 15% — ending stocks, the inventory left over at the end of a year’s worth of demand, would go from an already low 135 million bushels to a 51 million bushels deficit! That means we would have to cut demand by 6%, which has only happened six times in history. Based on this evidence, we are willing to put on some long bean positions.
1. Buy a November $15 soybean call and sell a November $16 soybean call for a cost of 15¢. There is an approximate fixed risk of $750 (based on end of August prices), a potential profit of $4,250, with no margin calls.
2. Buy a November $14 soybean call, sell a November $16 soybean call and sell a November $12 soybean put for a cost of 4¢. This has an initial risk of $200 but an unlimited risk if soybeans drop below $12. The profit potential is $9,800 and there are additional margin requirements with this position.
3. Buy a November soybean futures contract ($13.24 as of end of August) and buy a November $13 soybean put for 75¢. This covered long position has unlimited profit potential and a maximum risk of $4,950. If futures revisit the contract high, it would equate to a $15,600 move.
It has been a rollercoaster year for soybeans in 2008 and much of the volatility has been caused by factors besides basic supply fundamentals. Energy volatility, money flows from index funds and potential restrictions on those funds have all added to price volatility. But as the beans are harvested, supply should take center stage and, as we noted, beans don’t like wet feet.
Bill Biedermann is the senior vice president of Allendale Inc. in McHenry, Illinois. Reach him via the Web site www.allendale-inc.com .