Why Argentinian Weather Matters

Export sales came in last week for soybeans in at over 2 million metric tons with China in for the majority of the sale. Private exporters also announced three separate sales to China this week totaling 500K metric tons. Last week private exporters announced 4 days of sales for future shipment totaling over one million metric tons.

On Monday (12/19), China purchased another 264K metric tons. Weekly export inspections remain strong coming in on the low end at 1.4 million metric tons to the high end at 2.9 million metric tons over a six week period. The U.S. has shipped out 5 million metric tons of beans over last year’s pace and for the moment the rapid demand pace has not backed off. China clearly has been frontloading purchases as the need for meal and oil have them taking immediate bean delivery on purchase. A higher U.S. dollar has Latin American farmers fearing a further decline in their currencies. Therefore there’s reluctance on selling cash soybeans according to commercial sources.

The farmers see their cash beans (either in the bag or field) as being a hedge against a falling peso or real. The U.S. Dollar continues to make new highs and has traded to levels not seen since 2003. This has kept pressure on a basket of currencies that has caused issues in emerging markets. Since U.S. farmers have sold around 66% of their old crop cash soybeans, the market lacks a natural seller on declines, leaving long liquidation as the primary reason. This means that funds have to be given a signal to sell if prices are to sustain a more bearish price trend. Trend following funds are still long over 127K contracts as of (12/16).

The soy complex is looking at weather in South America as the tipping point for soybeans to ultimately break much below the 10.00 level or rally up and through the 11.00 level. Brazil’s weather so far has been optimal, but the ongoing concern is the drought like conditions for the main growing areas of Argentina. 6 to 10 and 11 to 15 day forecasts call for needed rains in these areas into year end and early January. Longer term forecasts deep into January turn dry again. If the beans are going to be pressured near term, these needed rains will need to emerge, if they don’t January and March bean futures will trade to new highs before correcting ahead of the January 12th crop report.

Those looking for a trade may consider an option strangle using February 2017 expiration. With some increased volatility back in the market ahead of Xmas and year end, I propose selling a February call and put. Look to sell the Feb soybean 1080 call/ 950 put strangle for 10 cents or better collecting $500 per spread minus all commissions and fees. Inherent risk lies if March futures settle above 10.80 or below 9.50, exercising either option at option expiration late January.

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.
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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. 

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