The recent advance in futures and strength in the dollar are likely to stimulate greater soybean acreage in South America. However, futures are currently focused on extremely tight meal supplies and strong crusher soybean demand to make up for overdue meal shipments. How long it will take to restock pipeline supplies of meal is unknown. But, once supply pipelines are adequate, market focus will shift back to South American crop progress, weekly export sales, and prospects for more than adequate supplies during the remainder of the season.
Meal Situation
Although the US is in the process of harvesting a record soybean crop, a combination of outside forces came into play to shape a near-term shortage. Livestock and poultry producers maintained only minimal meal inventories as harvest approached, expecting the record new crop to provide much cheaper prices into October and beyond.
Export commitments for new crop meal were record large as prices had declined into September and livestock/poultry margins were very favorable in most foreign nations. September crush, as reported by the National Association of Oilseed Processors (NOPA), was only 100 million bushels, the lowest since NOPA began reporting statistics in 1999. This was due to the tightest old-crop supply/demand balance in history.
Rains during early October delayed harvest, curbing availability of new crop supplies. Early harvested beans moved into export channels rather than crush. As a result, crushers were unable to meet domestic and export meal shipments on time. Railroads have been plagued by delays. A shortage of railcars, as well as engines, has created havoc for grain elevators and crushers. The rail slowdown only exaggerated shortages into record scheduled shipments of soybeans and meal.
A Price Collapse
Panic ensued, particularly in the meal arena, as crushers finally began to receive beans from farmers and were unable to ship meal to domestic users. Users began to pay high premiums for truck shipments. Since it requires from three to four trucks to equal a railcar, this creates uncertainty as to when the temporary shortage will end. Thus, the high price of meal and easing of soybean tightness as harvest approaches completion has pushed crush margins to extreme levels.
December crush futures reached an historic high of $2.13 per bushel on October 29. Cash crush margins were even higher. The incentive to crush and deliver meal to short-bought users has never been greater. It is my contention that as in most artificial shortages of this nature, a price collapse can be expected at the most unexpected time.
The Trade
I propose the following position trade to take advantage of a retracement in price. Buy the Jan Soy meal 350 put and sell the Jan soy meal 300 put for a purchase price of 4 points or in cash value $400.00. The risk on the trade is the price paid for the option spread plus all commission and fees.
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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.
