After a spring planting season where weather was sporadic at best with above normal temperatures in some parts, not enough precipitation in others, too much rain east of the Mississippi, and optimal conditions in recent traditional laggards up in the Northern grain belt, traders wondered how big of a cut in yields on last Wednesday’s USDA report would show. While they were surprised when the USDA raised the yields for corn and beans along with production and ending stocks, the news forced new longs selling and new shorts coming into the market forcing corn and beans down to their daily limits. In the old days of much smaller limits it took several days to price in a report like this. But with a 70 cent daily limit on soybeans you are able to satisfy the markets need to readjust its position.
A return to normal means a return to weather which is 90% of the pricing influence as crops go through key yield development time. This leaves bulls in the market hoping for deteriorating crop conditions and a smaller yield than the August USDA report and a sizable drop in harvested acres. This week’s crop condition report came in at 63 percent good to excellent which was unchanged on the week and one to two percent higher than previously expected. The 10 year average for this time of year is 58 percent. With plenty of rain moving across the grain belt, the yield outlook is improving. However the 6 to 10 day and 11-15 day is turning hotter and drier.
That being said the market won’t see any government reports until September 11th, and after that the quarterly stocks report on the 30th. If optimal weather continues with improving yield conditions I look for the market to test 8.90 basis November, and worst case scenario in my view 8.70- to the downside the next few weeks. If the market tests those levels, I would propose the following position trade in soybeans utilizing January options. I would look at buying the January Soybean 10.00 call and selling two January soybean 11.00 calls for 4 cents or in cash value $200.00. The risks on the trade are the price paid for the options ratio spread plus all commissions and fees. The second risk is that you are short an extra 11.00 call. Should all three options get exercised at option expiration, one would be short a futures contract basis January at 11.00.
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. Or please contact me at anytime at slusk@walshtrading.com
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.
