Last week saw the grain market start the week higher, off of the threat of subzero temperatures entering the western wheat states, then finding profit taking the next few sessions as the market prepared for the results of the USDA Outlook Forum Conference.  The Commitment of Traders Report showed trend following funds enter last week short 77,000 bean contracts up 20,000 from the week prior and near a record 86,000 seen last fall.  

The fear was that the bean acreage numbers at the forum might not be as bearish as expected.  Pre-report trade estimates averaged 86 million acres to be planted.  The outlook forum suggested 83.5-million acres of beans will be planted this spring versus a record 83.7 last year.  Though the report is down 200,000 acres, it is viewed as unchanged when talking of 83-million plus acres.  Of course, coming in 3-million acres under the pre-report trade guesstimates gave us a sharp rally on its release.  Though traders that participated in the pre-report forecast were surprised, the number compared to the year prior was very conservative, as many expected. 

The March 31st planting intentions report, a poll of 80,000 farmers is what the big traders are interested in now. Traders will look for the report to show a bean acreage number closer to their pre-report suggestion.  Pre-report corn estimates came in at 88-90 million acres.  The forum numbers were 89-million acres, down 1.6 million acres from last year.  Again this too is considered conservative. 

Coming into this week expect both corn and beans and wheat to be back to trading weather and supply demand fundamentals.  Even though we expect a larger bean acreage number on March 31st, we should expect a short covering rally prior to the report’s release on fear the farmers again will come in conservative on its number.  Trend following and index funds trade fear before fact and the forum report certainly has built in fear in the market place.  Corn strength will come from the perception that farmers will reduce the size of their crop by 3 or 4 million acres.

The Trade

I look for trend and index following funds to cover their short positions into the March 31st report thus pushing futures prices higher. Simply put, it is my view that a proper longer term trade that offers exposure to the long side could be the play. I suggest that traders look for variations of this proposed trade as March is a long month and volatility will increase in beans going forward.

  • I propose buying the July Soybean 11.00 call and selling two July Soybean 12.00 calls for a purchase price of six cents which correlates to a cash value of $300.00.
  • There are dual risks on this trade. The first is the price paid for the ratio call spread plus all commissions and fees.
  • The second is that there is exposure over the 12.00 level in July futures as you will be essentially short July bean futures at 12.00 if the extra 12.00 call gets exercised.
  • In this scenario it is important to note that if the whole trade gets exercised, the buy of the 11.00 call versus a sale of one of the 12.00 calls would gross $5000.00 in profit. 

#####

For those interested in a free grain webinar with Tim Hannagan each Thursday at 3:00 p.m. Central time, please click here.