For soybeans, the first quarter of 2014 will not be where we started on January 1 but where they end on February 28, and there’s sure to be a large price difference.
THE NUMBERS
The December USDA monthly crop report had soybean ending stocks at 150 million bushels. This is barely over the year prior carryover that took us to historic high prices. This leaves no margin for error as Brazil, the world’s largest soybean producer-exporter, heads into its key growing period in January and February, along with the world’s third-largest producer-exporter Argentina. Should weather there hurt yields cutting production appreciably; we can expect China to continue to overbook US beans pushing prices 1.50 to 2.50 higher. Good weather and talk of trend line yields at the end of February could see 11.75 to 11.25, on Chinese cancellations of previous US purchases bloating bean ending stocks.
This is one of those rare growing seasons where the path of least resistance goes both ways. Weather aside, look for index funds holding a huge long bean position, as well as 360 thousand long corn to sell, cleanout and balance the books after the USDA January 10 crop report, with a book balancing low by the last two weeks of February. The wildcard here is the weather in South America not turning bad.
SUPPORT
The late February low should hold as a low for corn and beans going into the growing season. Look for an acreage battle with higher prices into the March 28 planting intention report. Corn and beans will push higher in their seasonal effort not to lose acres to one another. Then an April correction followed by a May through July growing season weather premium rally. Funds like to trim long-held positions from early January to late February to get ready for their summer buying season, when they apply their largest fund monies committed on the year.
A SPREAD TRADE
Without a weather problem in South America we should expect beans to be the biggest loser to corn. A spread trade for the first half of this year is long July corn, short July beans. The spread could narrow to 5.50 July beans over July corn.
For conservative position traders, I recommend the following option spread position which is commonly referred to as a bear put spread. I propose buying the March Soybean 1220 put and selling the March Soybean 1150 put for a purchase price of 10 cents or $500.00. The risk on the trade is the cost paid for the spread plus all commissions and fees. The maximum one could collect on the trade is $3,500.00, if both strikes finish in the money at the time of expiration.
For those interested, Walsh Trading holds weekly grain webinars that are free for those who attend. They are hosted by our senior grain analyst Tim Hannagan. The link for this week’s webinar is here and that will take place this Friday at 3pm central time. Again signup is free and if you cannot make it live, a recording will be sent to your email. Best wishes and good trading in 2014!!
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.
