Soy Complex
Both beans and meal exhibited some back and fill the last two sessions of this week but nevertheless finished higher on the week. Since the Jan 12th crop report beans rallied from low to high 57 cents, while meal rallied 38.5 handles or short tons before profit taking occurred. March beans settled at 9.85 while March soy meal settled at 335. Today being February option expiration had some recent longs booking profits but what’s holding the market together is a potential weather premium being built due persistent dryness in Argentina. Beans and meal traded higher for 8 consecutive sessions before the Thursday/Friday sell-off this week. Producer selling was also noted as domestic producers who still have beans in the bin most likely used this push higher as a reason to contract beans at the 10.15/10.20 level in the deferred month contracts. Going forward, I’m seeing weather issues that could be a growing concern in Argentina and maybe even Brazil. While Northern Argentina receives needed rains this week and next, the central ans southern growing areas are too dry with no rain events scheduled in the 6 to 10 and 11-15 day forecast. WX Risk the Ag weather site is almost calling for drought like conditions for Central and Southern Argentina for February while near term in Brazil sees rains in the central soy growing areas receiving 9 to 12 inches of rain in the next 10 days. Please go to www.walshtrading.com for full weather report. If these reports are confirmed especially the one for Argentina, where its been too dry already in the southern half of the country, I would suspect that managed money funds who are short the market, look to cover and even build a long position into the market. Argentina, who is the number one bean crusher in the world, has had their soybean outlook trimmed from 56 million metric tons to 52 by some private South American forecasters. Aside from some cheap options plays one may consider into next week, I’m looking at calendar spreads in both meal and beans to take advantage of a weather rally.
Trades:
Buy the July 18/Nov 18 bean spread at 3.4 July over. Risk to negative 3 cents. Target 22 cents July over November.
Buy July 18/Dec 18 Meal spread at 2.4 July over. Risk to 2.5 July under. Target 11 over.
Buy the March bean 10.00 call for 8.4 OB. Risk to 4 cents. Target 30 cents.
Wheat/Corn
Earlier in the week, I suggested buying corn vs selling KC wheat at 74 cents KC wheat over with a 5 cent stop. As soon as you could say “losing trade”, I was stopped out with a 5 cent loss. While we have been advocating establishing long positions in both corn and wheat since Mid December (see 1st quarter 2018 outlook), the whipsaw price action in wheat earlier in the week ended up faking me out. I will say I suggested an option play in corn, buying the July 380 call and selling the 360 put for even money. That call/put 1×1 ratio is now trading at 4.4. cents. We also have been beating the drum since early January in buying Chicago/KC wheat and selling Minneapolis. We suggested that this spread would tighten from 1.95 Minneapolis over Chicago to 1.60 Minneapolis over, capturing approximately 35 cents. That spread settled today near 1.73, so we are nearing our target. Chicago and KC wheat vs corn put in new highs to end the week at 86 to 87 cents wheat over corn. It looks to me like this spread can push out to 95 cents wheat over. With funds short 135 K contracts of Chicago as of last week while being short corn 226 K contracts, the market is oversold and has succumbed to short covering by these funds. Persistent dryness or drought like conditions in the Southern Hemisphere and the U.S. western wheat belt tell me that one should be looking at cheap calls to the upside for both.
Trades:
Buy the July corn 380 call and sell the July corn 360 puts for 4 cents OB.
Buy the May 460 call and sell the May 430 put for 6 cents OB.
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