Soybeans reached a 22 month high in the first week of June invoking memories of the rallies and surge in bullish momentum not seen since the drought of 2012. End users that have been caught short bought meal and beans are some of the reasons for the continued rally in the soy complex. The market continues to endure some near term supply issues given crop losses and long harvest delays in Argentina. This squeeze is pushing prices higher as buyers scramble to secure soybeans. This is evident in futures spreads as the July/Nov spread traded down last week to a near term low of 22 cents July over November. The spread traded in just two sessions this week to 76 cents July over November for a gain of 54 cents from low to high on June 3rd. July beans rallied $1.01 in just two sessions from a weekly low of 10.68 to a high of 11.69. A surge in buying old crop/new crop beans spreads indicates a supply squeeze encouraging buyers to delay demand wherever possible, while incentivizing sellers to accelerate the marketing of crops. Late Thursday the Buenos Aires grain exchange released data highlighting the Argentina Harvest at just 78.1 percent versus the average at 92 percent at this time of year. While the exchange stuck by its harvest estimate of 56 million tonnes, it did not rule out heavy rainfall in parts of Buenos Aires province causing fresh production and quality setbacks. This leads to a perception in the market that demand for both beans and meal will switch from South America to the U.S. creating unexpected demand. This triggered a major reaction in the bean market with July meal and Beans leading the charge. Funds ended the week extending their massive long positions in the market. It was reported that Thursday June 2nd alone saw them buy 21K contracts in beans and 9K soymeal contracts. To say that the market is overbought is an understatement but for now the bulls don’t care as continued talk of major supply disruptions in the world’s number one bean crusher will trump anything technically. However, the USDA’s WASDE report is next Friday and with an extended long in the market by funds, I look for some profit taking next week. The longs have the profit and therefore the risk, and I look for some back and fill on the charts prior to the report.
An aggressive short position in the market to take advantage of profit taking in the market may consider the following. Look to buy the August 1050 put while at the same time selling 2 August 14.00 calls for a collection of 2 cents. There are multiple risks here with the first being all commissions and fees. A collection of 2 cents means one would collect $100.00 per ratio spread minus all commissions and fees. The second risk on the trade would be the fact that you are short two August 14.00 calls. Should the underlying futures trade significantly higher the call premium on these short calls will increase in value quickly resulting in a loss on the trade. Please use appropriate stop loss orders on your account.
For those interested I hold a weekly grain webinar each Thursday at 3pm. It is free for anyone who wants to sign up and link for sign up 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.
