Grain Spreads: Soybean Diagonal Explored

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Commentary

USDA made no changes to ending U.S. stocks for corn, wheat or soybeans. It’s not uncommon for the USDA to punt every once in a while, on a monthly release and in my view that is what happened. We may see a more accurate old crop update in April following the key March 31^st planting intentions report. That was largely anticipated, with the average analyst estimate for each commodity looking for a change of 5 million bushels or less. While soybean ending stocks didn’t change, USDA did increase its import estimate by 5 million bushels and its crush use forecast by the same amount. Based on the crush pace so far this year, there were whispers that ending stocks for beans may get cut down near 300 million bushels from last month’s 350 million. This was somewhat anticipated due to crush use upwards of 2.625 billion bushels so far for this marketing year, 50-million-bushels above USDA’s current estimate. Crush pace has been what is driving bean oil in my opinion and to a lesser extent beans. Beans have support from the administration as Trump keeps asking China to buy more. The President meets the Chinese Premier in April in what could set up to be a classic buy the rumor, sell the fact event. Until then this market remains supported on breaks as managed money defends positions. We could see old crop challenge the 20% higher on year threshold at 12.56. Currently we are sitting at 15% higher on beans just under 12.05. Funds are long 200K and could easily buy another 30 to 40K to drive prices to 12.50 in my opinion.

Trade Idea

Futures-N/A

Options-Buy the April Soybean 12.00 call and sell the May Soybean 12.40 call for a collection of 1 cent.  ZSK26C1240:J26C1200[DG]

Risk/Reward

Futures-N/A

Options-Risk here is unlimited. Therefore, I suggest using a 6 cent stop loss on a GTC basis from entry which risks $300 plus trade costs and fees. Offer the spread at a 30-cent exit, April 12.00 calls over May 1240s. Margin per option spread is $760.

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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