Grain Spreads: Hedge Idea Beans

Sean Lusk General Commentary Leave a Comment

Commentary: Soybeans fell over 14 cents today and is heading for a test of  key weekly chart support at $877.6. (ZSX20) Prices rose to $8.99 ¾ on Monday and closed near midrange ahead of the Weekly Crop Progress Report. On Monday, USDA again surprised the trade with an unusual increase in soybean ratings, adding another percentage point to the “good” category to push the overall G/E rating up to 73%. Soybeans have only rated that high or higher for the date in 1994 and 1992 since data began in 1986. Both years, USDA raised its July forecast by more than 5% in the August update and further increased yields into the final estimates in January.   Unseasonably cool mornings have occurred across the U.S. Midwest and Great Plains the past two days while a heat wave builds in the western part of the nation. StoneX forecast a final U.S. soybean crop of 4.496 billion bu. based on an average yield of 54.2 bu. per acre. If this is confirmed down the road ending stocks could swell to over 600 million bushels. If you couple that with potential Brazilian production next year at over 130 million metric tons, the world is awash in supply. Hedge idea for Soybean producers to consider into Fall and into year end. In my view the below strategy should be implemented immediately and then liquidated when the crop is 35 to 40 percent harvested. For Beans to reverse course in the coming days, two things need to happen in my view. First, the market needs to see an abrupt change in Midwest weather forecasts to hot and dry in the 6 to 10 and 11 to 15 day outlooks. Second, bullish data from the USDA versus expectations next Wednesday on the Supply/Demand Report.


Trade Idea:


Options-Buy the January 2021 9.00 put. Sell the January 2021 840/900 call spread. Bid even money upon entry.



Options-The max risk is 60 cents or 3K plus commissions and fees at option expiration in late December. I’m therefore suggesting this course of action for producers who have not yet priced bushels that maybe were hoping for a rally. Normally I would suggest exiting when harvest reaches 40 percent as the bears have priced in the crop at that point. However this year is far from normal and I would exit if the underlying Jan 2021 futures closed above 9.09. Please call me with any questions.

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