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Commentary
Per multiple news outlets including Reuters, reports are suggesting the oil and biofuel coalition is set to meet with EPA to recommend much larger biofuel blend quotas for biodiesel production for the next 2 years. This gave bean oil prices a shot in the arm this week, rallying to two-month highs. Managed money has taken notice as funds have flipped from short to long while buying another 10K bean oil futures and options contracts today. It is important to note in my view that even if the two parties settle on a solution, it must go through levels of red tape within the government between multiple agencies to hammer out legislation then law. Watch for a buy the rumor and sell the fact type of scenario here. February NASS crush yesterday afternoon came in at 189.0 million bushels, slightly above the estimate of 188.6. Meal and soy oil production dropped from January and meal stocks were significantly higher than a year ago while oil stocks were lower. This also aided funds to buy oil share, which is buy meal and sell oil. The WASDE report this past Monday showed that producers are forecasted to plant 83.5 million acres of soybeans this year. Assuming USDA’s trend yield of 52.5 bushels per acre, the expectation is to pit production at 4.33 billion bushels. The net result would be a small build in ending stocks to just over 400 million bushels. However, a decline in yield to 50.0 bushels per acre in the national average yield due to hot/dry conditions may would drop those stocks to just 188 million bushels, or just 4.3% stocks to usage. In my view the market as always will be very hypersensitive to weather. If one wants to be long. Get long new crop beans and meal contracts. They will my view would be most affected to a weather premium being built by managed funds who are currently short 30K in beans and 100K and near a record short for meal. Trade idea below.
Trade Idea
Futures-N/A
Options-Buy the January 2026 soymeal 350 vs 400 call spread at 5 points or $500 cost and risk plus all commissions and fees.
Risk/Reward
Futures-N/A
Options-The risk is the price paid for the call spread plus all commissions and fees. If one pays 5 points, risk 4 points or $400 from entry plus trade costs. I suggest working orders to sell the call spread at 30 points on a GTC basis to exit.
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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