Grain Spreads: Soy History Lesson

Funds have been covering their short positions in the soybean market en masse ahead of this weekends weather, China trade talks, and tomorrows uncertain crop production report from the USDA. The average trade guess for ending stocks is at 496 million bushels. A far cry from 640 million in September, and near 1 billion estimated just a few months ago. The average trade guess for yield is coming in lower at 47 BPA, vs 47.9 last month. World ending stocks are revised lower to 96.3 million metric tons vs 99.8 last month. The Chinese as of last night have said they will increase US Ag purchases if a short term deal can be agreed upon. Lots of noise in the market on a potential trade deal. I think we should stick to the charts. Remember, just two crop seasons prior, we finished with ending stocks between 400 to 500 million bushels. The following Spring, (April, May 2018) saw soybeans trade through 10.00, to 10.40. Then the trade war and tariffs began late May 2018, and prices lost 2.50 from last years high to this years low. If we go further back to the 2016 highs above 12.00, to this years low below 8.00, I would not be surprised to see a rally in the weeks to come to near 10.00, (9.94). This is a fifty percent retracement level from the 4 year high/low. (See Chart) Weather is going to be the ultimate decider in both the Southern and Northern Hemisphere moving forward. US growing weather looks to bring problems in the North this weekend and next week with blizzard like conditions in the Dakotas, while frost freeze events occurring in these regions along with the Great Lakes next week. Should it continue to present problems for US crops deeper into October, I would not rule out funds building a long position especially if it potentially results in lower ending stocks/ yield/ production/. Although its way early for worry, plantings are behind in Brazil due to drought like conditions there. Granted that can change quickly, but I think we need to keep an eye on it as funds are hyper sensitive to weather events especially drought in my view.

Over 940 spot beans then 949, a continuation rally of old crop beans could be seen in my view. Weather will be the igniter. Under 902 and its 880 and then possibly 840. Nov 19 has two weeks left as options expire on the 25th. Then first notice the week after. Watch Jan pricing for something longer term. If you are looking for downside, look at buying the Jan 900/860 put spread for 7 cents. I would XMAS tree the long side in Jan beans. Buy the 950 call for 21 cents OB. Sell the 10.00 call for 10 cents and sell the 1020 for 6 cents. Cost is 5 cents to entry plus commissions and fees. Risk is a settle over 10.70 Jan 20 beans at option expiration on 12/27. Please call or email me with questions and comments. I hold a free weekly grain and livestock webinar every Thursday at 3 pm Central. Sign up is free and a recording link will be sent to your email . We discuss supply, demand, weather and the charts. Sign Up Now

Sean Lusk

Director Commercial Hedging Division

Walsh Trading

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