Grain Spreads: Meal Plan

Sean Lusk General Commentary Leave a Comment

Commentary

The hyper sensitivity over US weather as it relates to the soy sector has begun in my view. This week the trade got its first look at bean condition and the results were mixed at best. Overall good to excellent condition came in at 67 percent versus expectations of 71 percent. The trouble spots are in the Dakotas which represent 15 percent of the nation’s production. South Dakota came in at 45 percent good to excellent while North Dakota came in at just 25 percent.  Keep in mind its very early and we are nowhere near key production time in late July into August. However with the extreme tight scenarios for new crop beans the hyper sensitivity maybe warranted at this point in my view. Tomorrow’s WASDE report has the average trade guess  at 146 million bushels for new crop soybean ending stocks. Assuming yields coming in at the five year average with lets say an increase of one million acres from the March planting intentions report. ( 87.6 million projected  in March versus an upward adjustment to 88.6 million on 6/30.) Ending stocks could slip to 110 million bushels. Hot and Dry forecasts into June 22nd west of the Mississippi River and to the Northern Plains  could keep a lid on any major sell-offs in beans for the moment in my opinion. It’s hard to predict the weather more than a week out so I will refrain from doing so. I think given the current tightness that the probability for major moves in either direction will be occurring on Sunday nights given flip flops in the forecasts over the Summer. Should production get curtailed due to weather, I think deferred meal could be the place to be. Deferred meal is sitting near ten percent down for the year. If beans come up short on the balance sheet, I posit that soymeal could in my opinion trade back to unchanged on the year at 429.80, and could potentially even rally to the ten percent higher on the year threshold.at 473.0.  In short I’m looking for value here and therefore suggesting a three way option strategy in January 22 meal options.

Trade Idea

Futures-N/A

Options-buy the January 22 soymeal 470 call and at the same time sell the January Soymeal 500/450 put spread. Bid negative  -37.00 on the entry.

Risk/Reward.

Futures-N/A

Options- One is collecting $3700.00 upon entry for the three way option spread minus commissions and fees. The risk is the maximum loss on the trade which is 5K plus trade costs and fees. If you subtract what you are collecting from the max loss of 5K, the risk is $1300 per spread plus trade costs and fees. If filled at -37.00, I would enter into a GTC stop loss at -45.00, reducing the risk some at approximately 800 to 900 dollars. Give the potential for some wild market swings come Summer, I want to have some exposure in  a longer term options strategy and stay away from futures contracts for the moment. Call me with questions.

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