Grain Spreads: On the Defensive, New Crop Bean Hedges

Sean LuskGeneral Commentary

Old crop/new crop soybean, soymeal, and corn spreads were weak all session today and despite the recent rally in outright beans and meal, the spreads have not been bid up. Whether today was merely turnaround Tuesday, or the start of some fund rebalancing, old crop/new crop spreads remain on the defensive. Recent weather events citing a stronger El-Nino pattern in the Southern Hemisphere, (hot dry in Brazil, too wet in Argentina), along with a potential trade framework being announced by China and the US are two of the reasons why deferred crop beans sit between (July, Sep, Nov) 945-960. We opened up 2018 near 960 for spot, while this years deferred are just underneath last years levels. Given all the bearish news for soy, funds remain reticent for now to be short this market. For me weather issues will need to remain at the forefront going forward with lower crop sizes being reported out of S.A. to hold the funds interest. An upside target sits at 947, which is a 50% retracement for beans from the high/low of the last 12 months.

If I am growing beans, I may consider stepping my toe in the water and using this recent rally for small percentage hedges of my projected bean crop next year. Lets look at Nov 19 beans. Option pricing on buying puts and selling calls is getting interesting in my view and maybe worth a look. Futures settled at 957.4. (1.8.2019) Buying the 920 put for 30 cents and selling 2 11.00 calls for 15 cents apiece, allows me to enter at even money minus commissions and fees. It maybe somewhat early but if I am a producer, I’m with the mindset if I am getting burned on the Board its gonna be if and when beans trade up and through 11.00 and not when they are at 8.50. Because we are so headline driven, its something to consider. I’m not saying we can’t rally further given weather and trade events. With ending stocks being close to a billion bushels, I am concerned without a weather driver, that these rallies should be used as selling/hedge opportunity. A trade with upside exposure that one should consider in my view would be to simply buy the July 1020-1100 call spread for 6 cents cost. Risk to 2.4 cents with a stop loss, risking 3.4 cents upon entry plus commissions and fees.

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