Grain Spreads: Meal Problems

Sean LuskGeneral Commentary

Commentary

There is some noise in the market regarding soy meal potential longer term in Argentina. In my opinion there is some chatter in the trade forecasting a bullish story regarding the country’s soy meal supplies, observing that if prices continue to correct, farmer selling of the oil seed may potentially  drop to nearly nothing. Considering the risk of peso devaluation, there are rumors that are suggesting the local producers are unwilling to run with negative ownership. This might considerably tighten soy meal availability from August forward, while assuming Brazil’s crush has already been maximized. There is also a potential in Argentina that a strike while always a possibility, could emerge. As a result cash sources have indicated  Argentina’s soy meal basis is now above the U.S.’s with Brazil’s basis rising sharply.

There is a lot of rumor here about what may happen with meal’s price. Meal has been the weakling of the soy sector over the last year as low global ending stocks for Palm Oil amid insatiable demand for vegetable oils has taken Soybean Oil to all time highs a few weeks ago. Funds in my view have bought the bean oil vs meal as a spread. However, Argentina is the world’s largest bean crusher. Should farmers hold supplies as suggested, it could create a short squeeze later in 2021. I attached a chart of front month futures (August 21), and its ugly if you are bullish. In my view it looks oversold, but that doesn’t mean its ready to rally. Wednesdays acreage number coupled with US growing season weather as it relates to soy ending stocks will drive price in my opinion the next six to eight weeks. If I’m betting on meal to move higher, I suggest playing an option strategy further out on the calendar.

Trade Ideas

Futures-N/A

Options-To get something on the cards to be long the Meal Board, look at January 22 options. Buy the January 22 meal 4.00/4.50 bull call spread for 5.00 points or $500.00 plus commissions and fees.

Risk/Reward

Futures-N/A

Options. The risk here is the price paid for the spread which is $500.00 plus trade costs and fees. The maximum one could collect is 50 points or $5000.00, minus trade costs and fees., if at option expiration, the underlying January futures price settles above 4.50.

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