Soy Complex
Last Thursday’s crop report resulted in major surprises for not only soybeans but for corn and spring wheat as well. Given that the report was at month and quarter end and in front of a three day weekend, the volatility following its 11 am release didn’t disappoint. The big surprise was the cut in prospective soybean acres for the upcoming season. While I believe that we will see revisions in the June acreage number, that report is a long ways off so lets discuss what this report tells us and how might one plan to benefit from it. The decrease in acres to 89 million acres of beans from pre-report trade guesses of just over 91 million acres planted and 90.1 million planted last year shocked the market as it was a bullish report day surprise. Common thinking into the report was for a decrease of corn and an increase of bean acres. Nobody saw both being cut to the guesstimate given by the USDA. To me it was as if two or three guys were sitting at a bar throwing darts at the wall with 89 million being agreed to after the fifth pitcher of beer was consumed. What was noticed following the report was the weakness exhibited in old crop /new crop bean and meal spreads on report day and during today’s session. We have been pounding the pavement on watching soy meal as your trigger here as to sell beans or not. The reason is Argentina and the dryness that persists there. As they are the worlds largest bean crusher, we are watching any aggressive end user commercial buying that may lead either May or July futures up past the 4.00 level. Last week we settled at 384.0 just above key trend line resistance at 383.0 a short ton. A close over meant we would move higher, which we did in early trading (389.7 daily high), but an intra-day reversal sent the market below 383 to settle at 377.3 basis May futures. While the soy and corn crops get downgraded in Argentina, it is becoming more of a known. What is known here domestically is that beans currently have a 555 million bushel carry and new crop acres are in decline. This puts old crop beans and meal in the cross hairs of over value as the question for the market will be what is planted and then grown and then harvested in the new 18-19 crop year. We have seen spotty demand in China so far although we have some recent purchases late last week. Its been too infrequent for a demand driven rally based off of Chinese buying so far and I’m not going to even touch the tariff possibilities yet. Next Tuesday we will have another look at ending stocks as the April WASDE report is due out on April 10th at 11 am central. Ending stocks may be reduced in that report but I think the trade will be eyeing the South American data more closely going into that report particularly for Argentina.
Trade Ideas:
Sell July 18 meal and buy Dec 18 meal at $12.00 a short ton July over. I’m looking at an eventual move to parity or perhaps a small carry. Watch May meal, look for it to hold 3.84,last weeks settlement. Should meal work lower so should this spread in my opinion.
Option traders or producers may consider this spread. Buy the Sep soybean 1040 puts and sell 2 1160 Sep calls for even money. Cost is commissions and fees.
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