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Market Focus Strategy: Spreads Say Sell Soybeans, Look for Replacement Options

Spreads have been the star of the soybean market show as of late.  Active bull spreading follows firm fall cash market performance and increasing interest from speculators who hang close to the front of the futures curve. The narrowing of spreads and general flat price strength run counter to the usual seasonal expectation of markets pressured by surging harvest supplies. Now, a quick futures sell off and relaxing for soybean spreads have market participants wondering if the party is over.

It has been covered in recent CommStock Reports why basis, spreads, and futures have all firmed together against the seasonal trend – USDA is making considerable revisions to the balance sheets after overshooting on supply projections and underselling demand; domestic consumption is recovering while strong export business is underpinning margin elevations; hoarding efforts by China and other big importers begin as La Nina stirs up concern for the next growing season; and new buying interest is showing in commodities as a result of a weakening dollar and rising inflation expectations.

Those with on-farm storage have been encouraged to use it while basis, spreads, and the board all rise higher in an attempt to entice additional selling; however, storage preference was given to corn after the soybean-to-corn spread stretched sharply into harvest and while the soybean curve inversion incentivizes selling now.

The relevant Market Focus strategy under consideration today is:

Sell Cash Soybeans and Buy a July Bull Call Option Spread.

The structure of corn and soybean spreads suggests that selling soybeans can serve as a hedge against patience on corn being stored.  But what if soybean futures are poised for bigger upside after the cash sale?

Consider amending your marketing plan to include hedges for soybeans sold across the scale this fall.  Hedging involves taking a position to offset risk exposed by the cash marketing decision.  Hedging will be seen as increasingly important for risk management if the agricultural markets are poised for a stronger, if more volatile, future as we expect.

Bull call spreads opened to hedge cash sales would establish a minimum cash selling price on grain delivered.  Basis is locked in with quality risk and storage and handling costs transferred to the buyer. Premium collected from selling an out-of-the-money call offsets part of the premium paid for purchasing an at-the-money call.  The short option side of the spread position is margined and risk of loss for the spread includes the net premium paid plus commissions and fees.  The options may be offset before expiration to adjust the effective selling price for the grain hedged.

Look out for related recommendations to follow.  Future updates will feature a look at how the Market Focus managed bushel programs can work with you to manage minimum price contracts.  Sign up to receive new alerts in your inbox!

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Disclaimer:

Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results.

Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice.

There is no guarantee that the advice we give will result in profitable trades.

The views and opinions expressed in this newsletter are those of the author and do not reflect those of R.J. O’Brien & Associates LLC. This report may contain political opinions as well as market opinions and commentary. Any content provided by Commstock Investments or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

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