Weather brought out the soybean bulls earlier this summer and had many predicting substantial reductions in yields for the 2015 US crop. But that was then, this is now. Over eager bulls may have tried to stretch a single into a double and now find themselves caught in, to use a baseball analogy, a run down.
While the weather bulls have driven soybeans to rally by $1.40 per bushel from mid-June to mid-July, the fundamentals don’t seem to support such a rally. If this is indeed baseless speculation, history suggests it won’t end well for the bulls.
While beans have since retraced some of their July gains, we feel the clock is running out for bean bulls and that further upside will be limited. This sets up a potential opportunity for call sellers as harvest approaches in September.
Below you’ll find a look at the real soybean fundamentals and suggests a course of action for astute option sellers.
Why the Soybean Weather Rally?
Soybeans have been in a mild but consistent downtrend since last November as robust harvests in both the US and Brazil bulked up global supply.
That trend was not helped by the US’s ambitious planting agenda in 2015. US Soybean planted area for 2015 is estimated at a record high 85.1 million acres, up 2 percent from last year.
Prices continued to decline as a wet planting season finished up in June. But it kept raining. And raining And raining.
The soaking weather pattern covered most of the key growing regions in the US. Illinois, the country’s top producing soybean state, saw 11-14 inches of rain in key producing counties in June – a record for many.
This of course, brought out the weather bulls. “Too wet,” goes the argument, “roots will rot.”
I’ve been trading soybeans since 1984. I’ve seen my share of weather rallies. And one thing I can share is that dryness and/or heat are typically much bigger enemies to a soybean crop that rain. True, it is not unheard of for too much rain to hurt yields, either though root rot, fungus or outright flooding (see 2008). But a period of heavy rainfall, while concerning at the time, can often be recovered from prior to harvest.
“Rain makes grain” is an old farmer axiom for good reason.
Such could very well be the case now as the second half of July has been warmer and drier, allowing plants in Illinois, Iowa and Indiana to catch up on their sunshine while root moisture levels remain adequate. Indeed, soybean prices back tracking into August reflected improving weather conditions.
USDA Yields Hurt?
The primary argument of the bulls is that the excess rain in June will hurt yields. But the USDA’s latest crop review does not seem to support this argument. The July 10 report left projected 2015 yields at 46 bushel per acre – unchanged from the June report. While below last year’s record yield of 47.8, this is a healthy yield and well above the 2013 figure of 44 bushel per acre.
Bulls continue to argue that the “damage” will not show up until the August report. Perhaps, but crop conditions in the July 12 condition report showed soybean plants in good to excellent condition holding at 62%. While this is below last year’s 72% for this time of year, its still a tick above the 10 year average of 61%.
While we do not pretend to know what the August USDA crop report will say (we don’t have to as option sellers), our guess is that any lowering of yield as a result of June rains will be disappointing to the bulls. A lowering of yields will only be bullish if it is greater than trader expectations. We think the odds of that are low. But a slighter larger reduction could bring a day or two long pop to prices.
That’s why you sell calls instead of short the futures. Just in case you’re wrong.
But the yields aren’t the primary reason to be bearish beans.
Ending Stocks Remain Burdensome
Think of the latest weather rally as a bullish actor on an otherwise bearish stage.
For US and world supply numbers for soybeans are burdensome which tends to add a drag on to weather rallies that can crop up during the year.
While the USDA lowered 2015/16 US soybean ending stocks to 425 million bushels in it’s last report (down from 475 million in June), they will still come in the highest since the 2006/07 crop year. (See chart below.)
US soybean ending stocks and stocks to usage ratio for 2015/16 are projected to be the highest since 2006/07.
US stocks to Usage is pegged at 11.4% for 2015/16. While lower than in June (largely as a result of smaller beginning stocks and slightly higher crushings), this figure also will surge to it’s highest level since 2006/07.
Global Stocks Higher
Global stocks appear even fatter with both ending stocks and stocks to usage surging to new record highs for 2015/16. This as a result of back to back bumper harvests in 2014 and 2015.
And while much is made of growing global demand for beans, modern farming techniques and genetic seed technology are more than holding their own. This despite the backlash against GMO crops. (We’re not here to make a political comment either way – only to spell out the economics of it and show you how to profit from it.)
Global soybean supplies will surge to a record in 2016.
Perfect Timing for Call Sellers?
In addition to a bearish global supply situation, call sellers may benefit from the timing of the soybean rally as well. The first half of August is when soybeans enter their critical “podding” phase, similar to pollination in corn. Once this phase takes place, the crop is said to be “made.” It is not uncommon for soybean prices to begin to weaken after podding until reaching harvest lows sometime in the fall. For this reason, we like the seasonal timing for bears now as well.
Conclusion and Strategy
Despite an early weather scare early in the crop cycle, we see the 2015 US soybean crop recovering without any significant downgrades in yields. Soybeans remain in a globally bearish supply situation which should continue to keep pressure on prices and be a drag even on a surprise yield reduction in August. With podding season around the corner, the widow for another weather issue is closing and the market will soon begin looking to price the newly harvested beans.
We feel a slight downgrade in yield in the August 10 USDA supply/demand report might give bulls just enough motivation to pump up call yields ahead of harvest. This would be an ideal set up for call sellers. Those not willing to wait can look to price November calls now as those premiums will likely disappear quickly if the August report turns out benign.
November Soybeans
While we typically like to sell deeper out of the money options (which are not available – perhaps because others are eying the bearish supply set up as well), soybeans are in such a way fundamentally that options sellers can venture a little closer to the money in this situation.
With all of the recent attention on Greece, China and Janet Yellen, there aren’t many news stories about soybeans. And that’s just fine with us. If you want true diversification, these are the kinds of markets that can give it to you. Chinese stocks or the Fed’s next move may peripherally affect some commodities values through currency fluctuations. But they aren’t going to change how many beans come out of the fields of Illinois next month. That is what makes commodities such a powerful diversifier.
We’ll be working closely with our managed clients in identifying opportunities as they present themselves in the month of August.
If you are a high net worth investor interested in learning about selling options in soybeans and other commodities through a privately managed account with OptionSellers.com, you can request a complimentary Investor Discovery Kit atwww.OptionSellers.com/Discovery Information is kept strictly confidential and no obligation is required.
James Cordier is the author of McGraw-Hills The Complete Guide to Option Selling, 1st, 2nd and 3rd Editions. He is also founder and president of OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television, Fox News and CNBC. Mr. Cordier’s book, The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014) is available at bookstores and online retailers now.
