Grain Spreads: Bean Counting

Sean LuskGeneral Commentary

Commentary

It is my belief funds hit the sell button across the Board today with many sectors finishing in the red. Perhaps it was profit taking or simply liquidation ahead of the Federal Reserve’s two day meeting and policy announcement released this afternoon. In my view soybeans and soy oil followed the grain and crude oil markets lower, with Crude futures sinking  down over $4.00 as of this post that pushed crude to three-week lows. Additionally, timely rains in South America, particularly Argentina, may have improved prospects for recently planted crops. It is my belief that the unwinding of crush spread positions probably powered strength in soymeal futures. Also possibly pressuring is the fact that the soybean harvest is over 70 percent finished, the market may still be facing pressure from new supplies. Limited soybean purchases recently from China isn’t helping the bullish cause either, as totals are light.  Keep in mind that next weeks WASDE report from USDA has private estimates raising yield and production. The average trade guess for beans is coming in at 362 million for ending stocks. That’s 42 million above last month and almost 200 million above the September report. The range of guesses is from 310 to 449. A number above 400 million would illicit a bearish reaction in my view. One of the reasons for the continued rise in the carry-out number is the increase in yield. Two months ago yield was just above 50 bushels per acre. The average trade guess for this Tuesdays report is 51.9, with a range of guesses from 51.5 to 52.5. If it comes in at 52 bushels per acre or above, we may see pressure to the downside. I wouldn’t be surprised for prices to get pressured in ahead of the report on Tuesday, We had a weak close today in my opinion. In my view it paints 1180/12.00 as a near term target, potentially ahead of the report. With this in mind, I posit the following trade. See chart below

Trade Ideas

Futures-N/A

Options-Buy the Dec Soybean 12.00 put for 6 cents or Better.

Risk/Reward

Futures-N/A

Options-the risk here is the price paid at 6 cents, which is $300 plus commissions and fees. If filled at 6 cents, work an offer at 30 cents to exit on a good to cancel basis. I would exit this trade on report day if we get a report day settle above 1245 in the underlying January 22 futures.

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Sean Lusk

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