Since the release of the January 12th crop report, soy beans have dropped over .85 cents.  The key question is, how much more down side risk is there left? 

There is a series of underlining fundamentals that could have both a bullish and bearish effect on the market.  On the bearish side, the trade believes that the late March planting intentions report will show 5% more soybeans will be planted this year.  This 5% increase comes at the expense of corn, due to soybean’s higher price. 

On the demand side, China who accounts for 90% of our exports yearly, recently canceled 459-thousand metric tons. China traditionally overbooks U.S. beans in December and January to offset potential supply problems out of South America during their key growing period.  Current Brazilian estimates are for a record crop this year, due to near perfect weather.  This could have China canceling overbooked beans earlier this year when normally we wouldn’t see it until March or April. 

It’s a negative demand signal in an export market that has been very strong recently.  Large, billion-dollar, index funds are still holding 130,000 contracts long beans, leaving room for more liquidation from a seasonal prospective. 

On the positive side, Malaysia, the world’s second largest palm-oil producer, directly competes with soy oil imports on the world market. It is suffering the worst flooding in 50 years and already has estimates of production being off 22% while exports of palm oil are down 12% already.  

Brazil is talking about moving 40% of its soy oil from this year’s crush into bio-fuel.  Though these two issues seem bullish for the market, this might not show up until longer term. 

Normally, soy oil is traded by the big trading funds in the crush spread, which is long soy meal short soy oil.  This year, we should expect the funds to be trading long soy oil, short soy meal, the reverse of normal trend.  Since the funds trade soy oil in the crush spread, it doesn’t matter to them if the soy oil goes up over meal or meal goes down farther than oil as long as the spread works. 

In other words, a bullish spread can work in a downward market.  This may happen near term.  At some point soon, we will want to put on the spread long soy oil, short soy meal, and then look for a reversal move to the upside.  Additionally, we look for a long-term planting and growing-season low to occur before February 15th.  

The Trade

In keeping with this premise, I propose the following trade.

  • Buy the May Soy meal 3.00 put and selling the May Soy meal 2.70 put for a purchase price of 4 points or in cash value $400.00.
  • The risk on the trade is the price paid for the spread plus all commissions and fees.
  • The maximum one could collect at option expiration is $3,000.00 if both strikes finish in the money at option expiration.

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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.