Grain Spreads: Funds long 900K in Grain Complex

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Commentary

The soybean complex is about to hold its collective breath as Xi and Trump meet tonight/tomorrow for which Trump says that trade will be the main topic of discussion.  There will be additional meetings tomorrow and tomorrow evening US time, which significantly raises headline risk over the next 48 hours. The market is likely to react one way or the other depending on the size of any Chinese bean purchase commitment. There is a risk that if the purchase package is not significant, What China will agree to beyond what it has already promised (25 MMT/year of soybean imports) isn’t clear. Clearly a downturn in negotiations could put the 25 million metric ton (MMT) promise in jeopardy and prices in my opinion will react. Just last night, China estimated their 2026/27 bean imports to drop 7.6% year-over-year on their smaller hog herd reducing bean demand. It is unclear how much reserve space China has for US beans, which are typically favored for their reserve due to lower moisture content than South America. The USDA also made an interesting point that next year, the growth in world soybean demand won’t be driven by the engine that is the Chinese livestock industry, but outside of it. China’s imports are expected to grow only 2 MMT year on year, while the non-China business will grow 12 MMT.

This morning rumors of further rejections of Argentina meal shipments in the EU led to an exaggerated sale of bean oil futures and buy of the meal contract. Oil Share fell 1.1% today, and July 26 bean meal 26 rallied $10 to a new high close. The oil share reaction is a reaction to the USDA’s S/D that shows robust ending stocks in the soybean oil table while servicing US biofuel needs making it appear as if the S/Ds are not as tight as perceived prior to the report. Pressure by falling energy prices today also weighed. We are coming into the mid-point of the 2^nd quarter. Managed funds are projected long a whopping 900K grain contracts. That’s massive. They are long over 500K in the soy sector alone. Old crop beans won't be affected by any new trade deal with China. That would affect the 26/27 marketing year. With this in mind, I suggest the following trade.

Trade Idea

Futures-N/A

Options-Buy the August Soybean 1150 put. Sell the August Soybean 1100/1150 call spread. Work to enter the spread at a 35-cent collection. 

Risk/Reward

Futures-N/A

Options-The maximum risk is 15 cents or $750 plus commissions and fees. Work a GTC stop at 45 cents, reducing the risk to 10 cents or $500 plus trade costs and fees. I'm looking to for August beans to eventually retreat back the low 11.00 handle. Should that happen, look to exit the position at a 20-cent collection for a gain of 55 cents, less trade costs and fees. 

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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