Impact of COVID-19 on Agriculture

Are Under $8 New-Crop Soybeans Likely?

Market Intel / October 3, 2018

Credit: Javier / CC BY-SA 2.0 

One of the key assumptions underlying futures and options markets is that futures prices are unbiased estimates of terminal prices and that volatility estimates inferred from put and call options are unbiased estimates of risk to the futures price. Because these principles are generally accepted, one can use the futures price and the option-implied volatility to estimate the distribution of the futures contract at expiration.

For example, based on the Oct. 1 futures and options settlement prices, there was a 50 percent probability that November soybean futures would expire between $8.21 per bushel and $8.91 per bushel. The mean of the price distribution was $8.58 per bushel, and the median price was $8.44 per bushel. Because of the skew of an assumed log-normal price distribution, the mean is greater than the median price. Figure 1 highlights the probability density function for new crop soybeans as of Oct. 1.  

Currently, as identified in Figure 1, there is less than a 20 percent probability that the new-crop soybean futures contract will expire below $8 per bushel (red-shaded bars indicate probability densities under $8 per bushel). That was not always the case.

New-crop soybeans settled as high as $10.53 per bushel in the spring of 2018, and at that point in time, the market expectation was a near 0 percent probability that the final settlement price would be below $8 per bushel. As the trade disputes accelerated, and favorable growing conditions became known, the probability for below $8 soybeans jumped to more than 30 percent in July 2018. The probability for below $8 soybeans eclipsed 30 percent again following the September projections for a record-large soybean crop.  Importantly, as the time to maturity decreased, the uncertainty and distribution around the mid-point decreased as evidenced by the smaller 50 percent confidence interval. Figure 2 highlights the expected distribution, and probability for below $8 soybeans, for new crop soybeans as of late 2016 to present.  

This growing season for soybeans has experienced very high volatility due to demand uncertainty and expectations for a record-large supply. The increased uncertainty was captured in the options-implied volatility and provided insight into the market risk expectations. While the current majority-expectation is for soybeans to settle above $8 per bushel, at times during the growing season the market did price in more downside risk and a likelihood for sub-$8 beans.

While the likelihood for sub $8 dollar new-crop soybean futures is decreasing, as harvest continues many farmers across the U.S. are already experiencing cash prices well below these levels. 

John Newton, Ph.D.
Chief Economist
(202) 406-3729

Share This Article

Credit: iStockPhoto 

New-crop sales of soybeans, corn, sorghum and cotton to China have been getting a lot of attention. These purchases are being closely watched and interpreted as potential signs as to whether China will be fulfilling their Phase 1 commitments, which were finalized in January 2020. Data from USDA’s Foreign Agricultural Service’s U.S. Export Sales Report, released on August 13 and covering sales through August 6, back up the rumors of large sales. However, how do new-crop sales compare to previous years? To find out, we compare new-crop sales (2020/21 marketing year) to the similar week from the last five years.

Full Article
Credit: fdecomite CC BY 2.0 

On the back of COVID-19-related price shocks and a record-high cheese price, the July Class I milk price was nearly $2.60 per hundredweight, or 13%, below where it would have been prior to a 2018 farm bill change, spurring the withholding of 8-plus billion pounds of milk over two months, a 32% reduction from the prior year, from Federal Milk Marketing Order revenue sharing pools across the county. As a result, FMMO revenue sharing pools were short $527 million in June and $667 million in July, for a combined $1.2 billion. This shortfall caused record-low FMMO minimum milk prices across the U.S. that showed up in dairy farmers’ milk checks as negative producer price differentials The PPD in California, for example, amounted to nearly -$10 per hundredweight for July. Put simply, most dairy farmers are not happy. To make matters worse, public and private risk management tools were unable to protect against these record-large milk check deductions.

Full Article