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Commentary
Cattle snapped back some today while soybeans and soymeal stay bid. Unknowns in the grain market are plenty and have the shorts covering across the board as the government and any reports on unemployment data to crop reports remain suspended . Make no mistake there is nothing inherently bullish in the grain market aside from China now buying beans. That matters and funds are covering shorts in meal and building a small long in beans. This is Xmas come early for bean producers. One can lock in $11.00 in beans and $4.70 in deferred corn using options on futures for what is to be stored. Not bad in my opinion considering where prices were in August. How many beans is yet to be determined regarding Chinese purchases but a sigh of relief for the farmer for the time being. Keep in mind we closed at 10.10 in the bean market for 2024. So, for all the noise and crying about no demand, the market sits at 10% higher on year. The balance sheet is anybody’s guess now and may remain until the government re opens. Expect the unexpected as this has gotten way too political in my view. The government and Trump administration is now bent on moving beans while pressuring beef. Despite the announcement of the US/Mexico border remaining shut, the government and Trump administration is bent on initiating any policy that lowers price. Look for continued pressure into next year while near term I see beef tariffs exempted for Brazil and increases in imports long term from other origins until the herds are rebuilt domestically which will most likely take a few years. In my opinion the trading strategy should be short cattle long term ad long grains in the same time frame. Trade ideas below. There is an old saying, don’t fight the Fed. For grains and livestock, it could read, don’t fight the government mandate.
Cattle vs Meal
Options Trade:
Buy the June 26 Live cattle 210/180 put spread for 500 points or $2k per spread plus commissions and fees.
Sell the July 26 soymeal 4.00/3.50 put spread for 45 points or a $4500 collection, less trade costs and fees.
Risk/Reward
The max risk here is $2500 for both trade plus commissions and fees. One collects $2500 upon entry less commissions and fees. The maximum one could collect at option expiration if all strikes finish in money is $16,500 less commissions and fees.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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