Grain Spreads

Sean LuskGeneral Commentary


Once again China is in buying US beans. This morning’s release by the USDA’s daily export sales reporting service announced private exporters sold 120,000 MT of soybeans to unknown destinations for delivery before Sept. 1. Unknown Destinations is spelled CHINA. Talk surfaced yesterday that China may have bought double the quantity. Trade this week has been low volume and low volatility ahead of the USDA’s domestic and world supply and demand forecasts on May 12. Traders are looking for a small increase in old-crop carryover to 488 million bushels. It is the USDA’s first estimate of new-crop carryover or ending stocks. The average trade guess is expected at 430 million bushels, but the range of estimates is big and offers the potential for surprises.

Futures rallies continue to be capped by a weak Brazilian currency and strong Brazilian soybean export shipments this month. Brazil government debt was downgraded this week, sending its currency to new lows against the dollar and domestic soy prices higher. Brazil is simply getting the lion’s share of China’s export business and the weak Brazilian Real is a big reason why. The next 5 to 7 days sees freeze and frost like conditions in the Great Lakes areas along with the Dakotas and potentially including a snowstorm that a big area stretching from the Eastern seaboard into New England. It may cause some re-plantings of new planted beans amid cold soils which could slow germination. The potential frost/freeze in my view in these areas would most likely cause more problems for soft red winter wheat and recently planted corn. Watch the Sunday night open for gaps on the charts either higher or lower on weather events over the weekend across the grain sector.

I think beans are cheap here given new crop ending stocks at or around 430 million. Trendline yield is coming in at a projected at 49.9 BPA. A 2 bushel per acre cut in yield tightens the balance sheet down the road. While planting is off to a rapid pace, look for it to slow with rains showing up all over the place in the 6 to 10 day. Prices in my view should rally from 8.50 to at least 9.00/9.20 to entice those to switch from planting corn to beans later in May and in June. There are gaps to the upside on the charts that in my estimation, if we rally, will be tested. I think one can layer in an option strategy, take a collection by selling a put spread and buying a call. I like this strategy especially into Tuesday’s report instead of futures as a report day bearish surprise could in my view do way more damage than the options strategy. September 20 bean chart below.

Trade Suggestions:


Options – Buy the Sep 2020 Soybean 9.00 call and at the same time sell the Sep 2020 soybean 10.00/9.00 put spread for negative 70 cents as a three way option spread. 



Options – One is taking a collection upon entry here. If filled at negative 70 cents, one is collecting $ 3500.00 on the spread upon entry minus commissions and fees. The maximum risk if beans never rally or move lower prior to option expiration, could result in a 30-cent loss. I would risk 15 cents using a sell stop at negative 85 cents, risking 15 cents or $750 plus trade costs. The risk is therefore 15 cents plus trade costs and fees. The goal is to Sell high and buy low here. To realize a credit on the way in and a collection on the way out, September beans would need to rally from 8.50 to 9.60. If we can rally to the gap, I estimate that one could cover this trade an exit at approximately negative 20 cents or in this area for a potential 50 cent gain. Sell high and buy back low.  

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Sean Lusk

Vice President Commercial Hedging Division

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