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Grain Spreads: Buying Acres?


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Soybeans

Commentary

Once again China is in buying US beans. This mornings release by the USDAs daily export sales reporting service announced private exporters sold 120,000 MT of soybeans to unknown destinations for delivery before Sept. 1. Unknown Destinations is spelled CHINA. Talk surfaced yesterday that China may have bought double the quantity. Trade this week has been low volume and low volatility ahead of the USDAs domestic and world supply and demand forecasts on May 12. Traders are looking for a small increase in old-crop carryover to 488 million bushels. It is the USDAs first estimate of new-crop carryover or ending stocks. The average trade guess is expected at 430 million bushels, but the range of estimates is big and offers the potential for surprises.

Futures rallies continue to be capped by a weak Brazilian currency and strong Brazilian soybean export shipments this month.Brazil government debt was downgraded this week, sending its currency to new lows against the dollar and domestic soy prices higher. Brazil is simply getting the lions share of Chinas export business and the weak Brazilian Real is a big reason why. The next 5 to 7 days sees freeze and frost like conditions in the Great Lakes areas along with the Dakotas and potentially including a snowstorm that a big area stretching from the Eastern seaboard into New England. It may cause some re-plantings of new planted beans amid cold soils which could slow germination. The potential frost/freeze in my view in these areas would most likely cause more problems for soft red winter wheat and recently planted corn. Watch the Sunday night open for gaps on the charts either higher or lower on weather events over the weekend across the grain sector.

I think beans are cheap here given new crop ending stocks at or around 430 million. Trendline yield is coming in at a projected at 49.9 BPA. A 2 bushel per acre cut in yield tightens the balance sheet down the road. While planting is off to a rapid pace, look for it to slow with rains showing up all over the place in the 6 to 10 day. Prices in my view should rally from 8.50 to at least 9.00/9.20 to entice those to switch from planting corn to beans later in May and in June. There are gaps to the upside on the charts that in my estimation, if we rally, will be tested. I think one can layer in an option strategy, take a collection by selling a put spread and buying a call. I like this strategy especially into Tuesdays report instead of futures as a report day bearish surprise could in my view do way more damage than the options strategy. September 20 bean chart below.

Trade Suggestion(s)

Futures-N/A

Options- Buy the Sep 2020 Soybean 9.00 call and at the same time sell the Sep 2020 soybean 10.00/9.00 put spread for negative 70 cents as a three way option spread.

Risk/Reward

Futures N/A

Options - One is taking a collection upon entry here. If filled at negative 70 cents, one is collecting $ 3500.00 on the spread upon entry minus commissions and fees. The maximum risk if beans never rally or move lower prior to option expiration, could result in a 30-cent loss. I would risk 15 cents using a sell stop at negative 85 cents, risking 15 cents or $750 plus trade costs. The risk is therefore 15 cents plus trade costs and fees. The goal is to Sell high and buy low here. To realize a credit on the way in and a collection on the way out, September beans would need to rally from 8.50 to 9.60. If we can rally to the gap, I estimate that one could cover this trade an exit at approximately negative 20 cents or in this area for a potential 50 cent gain. Sell high and buy back low.

Call me with questions. There are many ways to play the upside with defined risk and lower spread margins. Every Thursday I hold a weekly grain and livestock webinar at 3pm Central. We discuss supply, demand, weather, and the charts. Signup is free and a recording link will be sent to your email.Sign Up Now

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

Walsh Trading, Inc. is registered as a Guaranteed Introducing Broker with the Commodity Futures Trading Commission and an NFA Member.
Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment.
The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All information, communications, publications, and reports, including this specific material, used and distributed by Walsh Trading, Inc. (WTI) shall be construed as a solicitation for entering into a derivatives transaction. WTI does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.

Walsh Trading, Inc. is registered as a Guaranteed Introducing Broker with the Commodity Futures Trading Commission and an NFA Member.

Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

All information, communications, publications, and reports, including this specific material, used and distributed by Walsh Trading, Inc. (WTI) shall be construed as a solicitation for entering into a derivatives transaction. WTI does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.



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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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