Grain Spreads: Bean Counting

Sean Lusk General Commentary Leave a Comment

Commentary:

Included here is a chart of the Nov 2020 soybean contract. The market finished last week with some modest upside momentum. In my view it came on thoughts of better demand prospects from China and suspect weather meaning too dry in the eastern belt and too hot in the West. Recent rains over the last four days and more upcoming where its needed in the heart of the Midwest is starting to evaporate weather premium in the market in my view. Demand prospects from China have seen an uptick in June. This includes todays notice that Private exporters reported to the U.S. Department of Agriculture export sales of 132,000 metric tons of soybeans for delivery to China during the 2020/2021 marketing year. However demand prospects to China regarding Phase 1 future shipmemts are in question. One of the President Trump’s top advisors just last night was quoted that the Phase One Deal is over. While the President himsef stated otherwise, it raised further questions of the validity of the Deal moving forward. The drama ensues. November beans finished the day at 874, down 5.2 cents. I’m quite confident that we aren’t staying at this price level for much longer. Next Tuesday the USDA releases its quarterly stocks report. The pre-report guesses have an increase in bean acres at the expense of corn. While that has always been the thinking for sometime going back to the last quarterly stocks report at the end of March, to what degree if any will the USDA adjust? The better question maybe will it matter? Weather in my view will be 90 percent of the pricing influence through July and August and then to harvest for beans. Looking at the chart Im looking at two scenarios. One is for a retest of the 850 area or a test above the gap at 903. I would advise looking at strangles using short dated September options that are priced off the November 20 futures.

Trade Recommendation:

Futures-n/a

Options-Buy the September short dated 850 put and at the same time buy the September short dated 910 call.

Risk/Reward

Futures-N/A

Options-if filled on the option strangle for 20 cents, the risk is the price paid for the strangle which in theis case is 1K plus commissions and fees. I would put a stop loss on the strangle at or around 10 cents therefore risking $500.00 plus trade costs. Im looking for asignificant move as we move through growing season to near last years low at 791 or to pre -covid highs at 981. Call me with questions here. We can use weekly options for a volatilty play into next weeks report that has a lower risk.

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