Last Thursday’s Weekly export report showed Soybeans inspected and shipped came in at 59.3 million bushels versus 58.7 the week prior and four week average of 54. China was in for 44 million of the total vs. the four week prior weeks of 45, 18, 44 and 38. The trade had thought the 18 m.b. week was the beginning of China backing away from U.S. ports in favor of South American ports to fill their needs. However we are on the high side of shipments the last two weeks and China is not ready to switch ports of origin for their bean purchases just yet. The inspection numbers were a strong demand signal prompting a move from a 12.60 low this past Monday to 13.30 Thursday.
Traders expect China to begin cancelling previous purchased beans at higher prices as we enter February as 50% of Brazils beans were planted late and it will take until then to be far enough along to be sure of ample crop production. Last year’s overbooking of beans began to be canceled mid December. Thursday’s weekly export sales report showed 701 thousand metric tons of beans were sold last week versus 155 the week prior. China was in for 678 for old crop delivery and 512 for new crop delivery after September 1st.
China is still active buying U.S. beans as a forward hedge until weather determines yields. Chinese cancellations seem certain. The first cancellations will bring a sharp drop in prices. In the meantime weather is the single most important price factor. Hot and dry in South America brings more buying here as an insurance hedge. Wet forecast brings cancelation of previous U.S. purchases.
To begin the week, we saw a dramatic sell-off on Tuesday with soybeans finishing 35 cents lower on the day to the 1180 level. This coincided with a wetter and cooler forecast for Argentina which is the world’s number three soybean producer. If weather stays near optimal going forward in the growing areas of Brazil and Argentina, the trade will anticipate cancellations from China and more importantly a huge South American soybean crop coming once harvest begins.
Therefore I propose the following trade. If March futures can bounce to the 1290-1295 level, look to buy a put spread in beans using March 2014 options. The trade I propose calls for buying one March 1250 put and selling one March 1180 put for 8 cents, or in cash value, $400.00. The risk on the trade is the price paid for the option spread plus all commissions and fees. The maximum one could collect is $3500.00, if both strikes finish in the money at the time of expiration.
For those interested please join us for our weekly grain webinar series hosted by Walsh Trading’s Senior Grain Analyst Tim Hannagan. Our next webinar will be Friday January 24th at 3pm. Tim has been rated the number one grain analyst per Bloomberg and Reuters for the years 2011 and 2012 for his most accurate price predictions for both corn and beans. Admission to webinar is free and recordings can be sent to you if you cannot make it live.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
