Purchasing proteins is a bit like buying shares on the stock market. Prices vary day by day depending upon the balance between supply and demand, and when the former is so reliant on the weather internationally, and politics and market forces have their impact too, it is impossible to get it right all the time.

Price volatility has been a big feature this year, and this could feature going forward. This volatility needs to be factored into your decisions.

To this end, we have recently looked at the last 5 years of soya trading, to see if there are any lessons to be learned.

Soya Market 2012

The graph below shows the spot price for soya over the last 12 months.

As you can see prices rose steadily through the spring/summer, and then began to fall away through the early part of winter. But is this typical?

The graph below shows the average soya prices between 2008 and 2012.

This graph is very different to the past 12 months, showing how atypical this year has been. Prices do seem to be highest in the summer period when there is uncertainty of harvest yields, but not as dramatic as this year. However, if we look at the individual years you can see it is not as simple as that:

 

Most years have seen a different trend in the spot price, but can we formulate a buying strategy based on this information? Well, we have had a go!!!

Strategy for Protein Purchase

We have analysed the historic soya purchasing prices from the Straights Direct Newsletter, of both the spot and forward markets over the past 24 months.

Then we have gone back and calculated what would have happened if you had followed these 4 strategies over this period of time:

  • Buy equal monthly amounts each month on the spot market, irrelevant of price.
  • Buy equal monthly amounts, on forward price one quarter ahead, irrelevant of price.
  • Buy equal monthly amounts, on forward price 12 months ahead, irrelevant of price.
  • Book all requirements 12 month in advance on forward prices for each quarter.

We have considered a scenario of sourcing 360 tonne soya per annum, and looked at what the cost would be if we used the above 4 strategies. We have only got the data to be able to do this for the past 2 years. This is what we found:

 

 

2012

2011

 

£ Total

Price/t

£ Total

 Price/t

Option 1

133,440

371

102,240

 284

Option 2

133,200

370

101,760

283

Option 3

116,460

323

100,320

279

Option 4 – best month to trade

100,080

278

92,340

256

Option 4 – worst month to trade

150,480

418

110,250

302

 The cheapest option is to buy your 12 months requirements ahead on the spot market (Option 4), but only if you do it in the right month! – get it wrong and you end up paying way over the odds. A great option if you have a crystal ball that can predict the market – but if you have one of these why are you farming???!!!

The next best option is to buy your monthly soya requirement 12 months ahead on the forward price (Option 3). If you had done this in 2011 you would have ended up paying £279/t in 2012 for your soya compared to £370/t if you bought it spot month by month this year.

There is little difference between Options 1 and 2, but they are both more expensive than the average of the best and worst case scenarios of Option 4, particularly this last year.

Overall Option 3 looks attractive.

Unfortunately we do not have the historic data from the same data source to go back earlier years, to see if this strategy would have worked in previous years – but we do intend to follow this over the next few years and update you on our findings.

There is no certainty in the feed market that what has happened in the past will happen in the future. But there is a belief in the market place that volatility will only get worse over time. Therefore having a strategy to manage the risk looks attractive.

Buying Soya – Option 3

The pros of this type of system is that over time the peaks and troughs should average out so you may not be the best winner, but you won’t be the worst loser either. And such a strategy is easy to implement without having to constantly think ‘is it the right time to do a deal or not?’.

However, the cons of this system is that in a sustained market fall, you would end up paying more – but this hasn’t seemed to happen in recent years, and it is difficult to see why demand for soya would suddenly fall.

If you are purchasing straights we do advise you to subscribe to at least one traders newsletter so that you can keep abreast of what the protein market is doing, as ultimately the responsibility for buying is up to you.