Soybeans, Corn, and Wheat continued south on Monday as managed fund unwinding continued from last week in my view. Although both beans and meal firmed to close last week, the absence of any weather premium along with unease regarding trade deals with China kept sellers active amid fund liquidation. I am hearing a lot of noise regarding these tariff deals with China and how any supposed agreement may mean that China agrees to buy an additional $25 billion worth of US grain going forward. As anything seems possible these days, the trade deal that currently sits in place allows China to cancel any sales for future shipment made from the US when they see fit with the hope that they can fill their needs when prices break or shift sales to South America. This shell game that the Chinese play has always been bearish from a demand perspective with rallies in soy relying on weather scares. This years Argentinean drought or last years heat dome that started at the end of June until late July would qualify in my view and be recent examples. South America in the past year particularly Brazil has accounted for over 60 percent of China’s bean purchases. To me the trade is hoping to see a new trade deal reworked to favor our producers. However until the cancellation of prior purchases by China is discontinued going forward, why would it matter in the long term?
Currently demand has been spotty for beans while planting weather has been ideal as producers are at a planting pace ahead of key five and ten-year averages. Even meal looks suspect here and would need to hold current levels to prevent a bigger break. What’s next? In my view I’m seeing some peculiar pricing in options. July beans settled today at 1001.6. The 10.00 put settled at 12 cents, with the 9.90 at 7 cents. August beans settled at 1006.6, with another month of time, the 1050 call settled at 12.3 cents. The pricing tells me that the skew is weighted to the call side. I understand July bean options expire in 18 days, with August option expiration July 27th. Major trend line support is down at 9.81, coming from last years April low to this past January’s low this week. Should we continue to move lower but hold trend line support consider this strategy.
Sell the July 990 put and buy the July 980 put and collect 5 cents.
Buy the August 1050 call and sell the August 1120 call at 5 cents.
Risk is 10 cents, max is 70 cents. Plus all commissions and fees.
The strategy calls for a break to get filled at these spread prices , and then look for a rally into month and quarter end. Call or email me with questions. In my view grains could rally into 4th of July weekend amid a weather issue and seasonal tendencies.
Each Thursday I hold a weekly grain and livestock webinar at 3 pm central. Signup is free and a recording link will be sent upon signup. Call me at 888 391 7894 or email me at [email protected]