Last Monday’s USDA crop report had no surprises to trend any of the grains. 
Corn had the biggest cut in stocks coming in at 1.481 billion bushels, down 150 million bushels from last month.  It is a small cut in stocks but it’s the third consecutive monthly drop in ending stocks.  The trade will expect the March report to drop as well. 

After month end profit taking we can expect a move higher into the March 10th monthly USDA  crop report, then higher again into the March 28th planting intention report expected to show farmers will plant two to four million acres less corn and more soybeans.  There’s no major bull move here with our 1.481 billion bushels ending stocks as ample supply but all the bearish news is in and with funds heavily short we should expect more short covering on several expanding issues.  The main issue is we’re exporting ethanol to Brazil and China. This will draw down ethanol reserves requiring more corn processing.  Additionally more corn in the feed ration as wheat prices are too expensive compared to corn to blend into the feed ration.  Last year saw a record amount of wheat into feed usage. 

Wheat has ample supplies and demand is neutral at best. However trend following funds hold a short position of 90,000 contracts.  We’ve seen short covering strength off declining crop ratings and a continued drought in the western U.S. wheat states. Note, western plains wheat will break dormancy in March. March could be a big short covering month. Wheat closed right on resistance last week and followed the beans higher Tuesday.

The bullish news for soybeans in my view is that Argentina, which currently is the number three world bean producer and number one exporter of soy meal and soy oil continues to store what’s left of last year’s crop or 11 million metric tons.  Farmers have been unwilling to sell with a 35% tax on them and this left their crushers unable to meet demands. 

Our market looks at them just like a drought or any bullish news keeping beans from coming to market.  Thursdays weekly export sales report showed 173 thousand metric tons were sold last week, a very low number and bearish demand signal.  301 thousand metric tons were switched from unknown and 326 thousand metric tons to decrease from unknown, with unknown spelled CHINA.

We had switches and decreases of over 600 thousand metric tons but we also have an increase or purchase of 320 thousand metric tons for China.  This is what sent prices higher last Thursday into early Friday, along with fund buying on Tuesday the 18th. However all the switches and decreases and cancellations are adding up signaling a near-term top might be in sometime this coming week. With this in mind I propose the following trade.

TRADE IDEA

For a conservative position trade, I will look at buying the April Soybean 1300 put and selling the 1220 put against it for 8 cents or $400.00 risk. The risk is the cost of the trade plus all commissions and fees. The maximum one could collect on the trade is $4,000.00, if both strikes finished in the money at expiration. This is a conservative way to be short the market with the possibility of falling soybean prices due to future Chinese cancellations of previous US purchases and funds taking month end profits.

WEBINAR

For those interested Walsh Trading is holding our weekly grain webinar series this Friday February 21st at 3pm central time hosted by our Senior Grain analyst Tim Hannagan. Tim has been ranked #1 by Reuters and Bloomberg in 2011 and 2012 for his most accurate end of year price predictions for soybeans and corn. Registration is free and if you cannot attend live, a recording will be sent to your email upon signup.

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.