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Grain Spreads:Soybean Gameplan January Crop Report


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Spot soybeans saw 2019 close at 955.4. It finished the year up approximately 35 cents. Not much of a percentage gain but up nonetheless. Demand remained dismal amid the ongoing trade war with our biggest soy buyer China. To a lesser extent continuing feuds with Japan, the EU, and the constant delays with NAFTA 2.0 certainly didnt help. Any rallies that emerged were supply side issues regarding late plantings in the US along with late harvests, lower planted acres, and questionable yields. In fact we haven't had an accurate read from the USDA for 2019 US production since the October WASDE report. November and Decembers weren't surveyed results due to late harvests amid adverse weather. Prior to that late SPring early Summer ending stocks figures looked to come on in at a burdensome billion bushels. Easily a record amount. However December's WASDE had them projected at just 475 million bushels. This was a result of the poor growing conditions that most of the growing areas endured in 2019. Remember its never the same everywhere as far as condition, but production estimates for the 2019 growing season are coming in close to one billion bushels less than the year prior. Thats significant but has been priced into the market in my view.

Tomorrows average trade guesses for Soybeans come in as follows:

Average trade guess for yield at 46.6 BPA vs 46.9 in December.

Production at 3.51 Billion bushels vs 3.55 Billion in December.

Ending stocks at 424 million vs 475 in December.

The range of estimates is obviously wider for all three. We will also be receiving USDA estimates for harvested acres and future outlooks for US demand. Whether they factor in greater demand due to the passage of NAFTA 2.0, and more importantly a Phase One Deal from China is an unknown. If I had to guess they will not be factored since nobody knows the particulars yet for these agreements in my opinion. Plus they will be guesstimating South American soybean yield and production albeit early from Brazil and Argentina.

Im unsure on future movement here. There is a bearish and bullish case too to be made longert term. South American weather in Late January through February will be the ultimate decider on global carryout numbers and have consequences regarding future US demand. China can simply promise to buy significant tonnages but never follow through. Which is what they have always done. Promise to buy for future shipment, then cancel and replace with South American cargoes leaving the US with a glut of supply. Tomorrows report in the near term should we see a bullish surprise could ignite a rally up to 971 basis March soybeans with the next target 994. Bearish data would send prices down to 933.4. A close under and its 921.4 , which is the 200 day moving average and a fifty percent retracement from the December low made at 882 to last weeks high at 961. A significant area. Should it not hold its katy bar the door potentially. We could see funds pile on the short side amid good SA weather and sink the market to 882 then 850 deeper into the January/February timeframe. However I dont think this outcome will occur until we get past the Chinese Phase One signing next Wednesday and a better gauge on weather in South America.

Into the report, I think this maybe one course of action one could take. Strangle the beans using put options to the downside. Buy the outright Feb 930 put for 4.4 cents or $225 plus commissions and fees. For upside Im going to buy the July20/Nov 20 bean spread at a 4 cent carry or July 20 under. Stop loss at 8 cents under risking $200.00 plus commisisons and fees. If we get friendly bean numbers tomorrow it may give thoughts to a tightenting situation where this spread will trade to an inversion in my view and potentially a breakout for beans to the upside on any buy the news event next week, re: China. In addition t on bearish numbers tomorrow I would have the option to cancel my stop loss on the futures spread and simply sell the July portion of the spread. If the market breaks support tomorrow or next week, I might not have a problem being short Nov 20 beans around 970. Producers might be most intersested in this portion of the trade. (Chart on July/Nov Below)

Note: In the last five Presidential election cycles the average price for beans in the first two fiscal quarters of those years rallied on average a whopping $3.45, with big gains posting in 2016, 2012, and 2008. Granted weather was a major reason in those years in my view but something to consider. Please join me everythursday at 3pm Central for a free grain and livestock webinar. We discuss supply, demand, weather, and the charts along with trade ideas for speculation and hedge purposes. I can be reached at 888 391 7894 or slusk@walshtrading.com

Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

312 957 8103

888 391 7894 toll free

312 256 0109 fax

slusk@walshtrading.com

www.walshtrading.com

Walsh Trading

53 W Jackson Suite 750

Chicago, Il 60604

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About the author


Sean Lusk is a registered commodity broker and Director of the Commercial Hedging Division of Walsh Trading in Chicago. Sean began in the business as a runner on the trading floor during summer breaks from college in 1993. Upon his graduation from Southern Illinois University at Carbondale in 1996, Sean began his career on the trading floor of the Chicago Mercantile Exchange (CME). Overseeing billions of dollars of transactions working as a clerk in the Eurodollar pit, Sean took the next step and became a floor broker and member of the CME in 2003. He handled customer orders for banks and investment houses from all over the world from inside the Libor pit at the CME.

Now, at Walsh Trading, Sean utilizes his experience in the marketplace and his professional client service skills to aid and assist customers in their trading endeavors.  

He writes daily and weekly commentaries focusing on both the Precious Metals and Agricultural Markets along with related market activity.

Sean has been quoted in various media outlets discussing futures markets. 

These include:

 

  • Futures Magazine
  • Reuters
  • Forbes
  • Kitco
  • Nikkei Press
  • CCTV.com

 

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