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

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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.

Copyright © 2020 CommStock Investments, All rights reserved.

Market Focus Strategy: Plan for Higher Corn Prices, Hedge for Higher Volatility

By | Market Focus Alerts | No Comments

Grain futures and basis have strengthened in defiance of harvest pressure while spreads recently tighten further to put a premium on current delivery and discount on the incentive to carry. Market volatility has also risen counter-seasonally to help amplify sell or store decisions for farmers weighing how much to reward the market and how much to believe in further upside potential.

We see potential setting up for stronger – but also more volatile – grain markets. Although the broader outlook is improved, we find that plenty of risk remains, especially in the short run. Consider whether you agree with these long-term positives and short-term negatives:

Long-term Bullish

  • USDA on path of correcting global grain supplies lower, China demand higher
  • La Nina, ongoing dryness for Black Sea and South American growing regions
  • U.S. dollar falling against competitor and customer currencies
  • Outside money taking an increased interest in commodity inflation story
  • Chinese pork market recovering from African Swine Fever
  • Global meat consumption recovering from Covid pressure

Short-term Bearish

  • U.S. meat consumption vulnerable to Covid this winter
  • U.S. ethanol consumption vulnerable to Covid this winter
  • Election outcomes are source of uncertainty
  • Political tensions with China rising again
  • Short-term weather conditions improve for global planting efforts

With this outlook, the Market Focus program is reviewing strategies for protecting stored corn with put options and keeping upside potential open with a futures replacement hedge:

The Market Focus strategy under consideration today is:

Buy May Corn Puts and Buy September Corn Futures.

Buy May corn puts for a portion of unpriced bushels in storage and buy September futures to hedge cash sales made during harvest. The position is structured to protect premium that exists in the corn futures market out to May, where the put floor is placed, while the long futures replacement hedge is opened in the discounted September contract, which could enjoy relative support if the market turns down into May options expiration. Conversely, the September futures contract could benefit if new-crop production concerns eventually become a source of support for the market.

The trades are structured to benefit from additional futures upside and may help to hedge cash positions for higher volatility in the months ahead. Long put options risk the premium paid plus commissions and fees, but a selling price is not locked in if futures prices rise. Long September futures re-establish price risk so that gains or losses can adjust the effective cash selling price on bushels already let go. Gains for the long put options may offset some losses for the long futures position, but the futures and options relationship is not penny for penny and separate use of the May and September contracts introduces calendar spread risk.

Stop-loss and profit-taking targets are advised upon position entry and marketing plans should include consideration of basis risk. Succeeding program updates will consider legging into a bear spread or fence with the sale of out-of-the-money May corn options to offset premium paid for nearby purchase of the puts. Program analysis will also include a look at scenarios for rolling long May puts forward to long July or September puts, or for buying weekly puts that could be used after May options expiration on April 23, 2021.

There are many headline risks unique to months ahead, including election outcomes, decisions on trade and ethanol policy, the Covid pandemic response, USDA crop report changes, and more. While 2020 may still have bearish surprises in store for U.S. agriculture, the long-term view is shaping up more positively tp present opportunities for those positioned to participate.

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The Market Focus program may be able to assist you with execution of this strategy or one that fits your marketing plan.

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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.

Copyright © 2020 CommStock Investments, All Rights Reserved.