Last week’s weekly export sales report showed 102 thousand metric tons of beans were sold the week prior for future shipment. This was down 67% from the week prior and 29% under the four week average. Yet prices rallied 8 cents into the close. So what is up with the bearish report and bullish response? There were several issues here. One, energy prices such as crude oil finished the session higher most likely signaling inflationary buying. The US dollar was lower giving us a signal that cheaper dollars buy more grain and talk that independent truck drivers in Brazil are on strike not allowing grain to move to port for export. These strikes last about two days as a rule of thumb. A closer look at the numbers tells us another story. Export sales are at 99.6% of the projected USDA exports for the year that ends August 31st with the new marketing year beginning September 1. This means that we can only sell 10 thousand metric tons each week until that point to reach the USDA projection. Three weeks ago, sales were negative on the week followed by the next two weeks of positive sales. Even though positive sales would normally be considered bearish and are very small they exceed the 10 thousand metric ton amount to meet the USDA projection. We need to start seeing more cancelations. If not, the fear here is that the USDA on its next report in May will have to raise its export sales projections and lower ending stocks. Last week’s numbers though bearish, created fear of a bullish report to follow and the market trades fear before fact. With non-commercial and non-reportable funds short 116,000 contracts it’s easy to get a short covering rally off anything that seems friendly to the market. If beans are going to break out to the upside or collapse to the downside, the trade has to know how many acres producers are going to seed this year. With uneven weather events with too much rain in the Southern Delta and not enough in the Northern Plains it is uncertain as to whether the acres of corn plant to be seeded will exceed or fall short of the planted acreage report. If weather does not improve traders expect to see fewer acres of corn and more acres of beans planted as beans can be planted later.
Trade Strategy
I therefore propose the following trade. For a longer term position trade I would look to buy 1 September Soybean 10.40 call and sell two September 11.20 calls for 3.4 cents or $175.00 cost. There are two risks on the trade with the first being the cost of the trade plus all commissions and fees. The second risk is if all three legs of the option call spread finish in the money at expiration, one would be short a futures contract at 11.20. In this scenario one would collect $4,000.00 as the long 10.40 call would be exercised against one of the short 11.20 calls collecting eighty cents. Please be aware of all commissions and fees on the entry and exit of this trade.
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For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 PM central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. Link for next week’s webinar is below. 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.
