Commentary
A combination of speculative buyers and managed funds pushed the soy complex to fresh multiweek highs, with soy oil leading the complex early on as bullish traders cheered a trade deal between the U.S. and India. This past Tuesdays USDA’s monthly supply & demand update was fairly uneventful, with no changes to the soybean balance sheet. A 2 million metric ton (MMT) bump in Brazilian production to 180 MMT did capture some attention, though it wasn’t unexpected in my view. Some ambiguity does loom over the size of the Brazilian crop, as Conab’s estimate last week stood at 178 MMT. Too much rain in northern Mato Grosso may be adding uncertainty the issue as producers work to harvest a damaged, high-moisture crop. Some farmers are reporting says that 30% or more of the seeds are moldy, shriveled, broken or otherwise of such poor quality that grain elevators won’t accept them because they cannot be blended with good quality seed and still meet the international standard. It’s also important to note t that other areas are optimal and that the potential exists that the damaged areas will be made up for by better yielding areas in major growing areas like Mato Grosso. Aside from potential Brazilian crop quality issues the trade will be in my view focused on two issues, First, is that we might have another trade deal with China coming in the weeks ahead that could result in another 8 million metric tons (294 million bushels) of current year supplies going to China. The second is that we could see the U.S. EPA send its final biofuel regulations to the White House Office of Management and Budget as soon as next week. I believe that whatever EPA decides, we could see oil prices lose to meal in a buy the rumor/sell the fact type trade. July meal looks poised to retest November highs in my view. This opinion would be aided if hot /dry weather persists in Argentina. Low risk and high reward trade below.
Trade Idea
Futures-/N/A
Options-Buy the June Meal 340/370 call spread for $300 OB.
Risk/Reward
Futures-N/A
Options-The risk on the trade is the price paid for the option spread which is $300 plus commissions and fees. I’m looking to risk no more than $200 from entry with an objective of 15 points to exit for a gain of 12 points or $1200 per spread less commissions and fees. I have more ideas here aside from this option play.
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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