Shortages and rising prices define today’s economic reality. Crude oil is up 106% since last October, and recently hit a 7-year high. Natural gas is up 131% and hit a 10-year high. Container ships are stacked up at key ports on both coasts due to a shortage of labor. The arrival of North America’s soybean crop has helped keep a lid on price, but we don’t believe this will last past its current harvest.
Energy prices are of particular concern. Farmers require gasoline and diesel fuel for their equipment. Natural gas is a key feedstock for fertilizer. Consequently, the cost to grow and ship soybeans is going up. These will undoubtedly factor into producers’ decisions of what and how much to plant this year in South America – and next year in the Northern Hemisphere.
Global supplies of soybeans remain extremely tight. The US Department of Agriculture’s (USDA) most recent estimate of old crop stockpiles came in higher than expected but, at 256 million bushels, is down a whopping 51% from last year. As the chart below illustrates, the USDA estimates China will import a record number of soybeans from the US this year despite the ongoing trade war.
Will La Niña Leave Key Soy-Growing Areas High & Dry Again?
La Niña, a cooling of waters in the Eastern Pacific, is expected to return this year. Will it generate the same kind of problems that plagued this year’s crop? Mother Nature is capricious, so it is too early to tell. However, given the current tightness in the market, even a small glitch in global growing conditions could pose big problems. Global climate change could magnify the effects of La Niña, making weather more important than ever when it comes to price.
South American farmers are busy planting crops now. Brazil recently overtook the US as the world’s largest producer and exporter of oilseeds. Brazilian soybean farmers are so confident of higher prices that they are hanging on to a large portion of last year’s crop. Some of this may be due to fears of a politically-generated collapse in Brazilian currency, making their stockpiles a greater store of value than cash. But the effect is the same: there are fewer soybeans available for consumption at current prices.
Season of Uncertainty
Soybeans will enter a season of uncertainty once the Northern Hemisphere harvest is in the bin and the focus shifts to South America. Traders will be watching weather in the soybean-growing areas of Brazil and Argentina closely. Tight supply/demand conditions should amplify any surprises. The first of these surprises could come as soon as October 12 when the USDA releases the October World Agriculture Supply Demand Estimates (WASDE) report. Any adjustment towards lower stockpiles and tighter supplies could send prices up in a hurry.
Data Source: Reuters/Datastream
Current Weakness Is Opportunity to Re-establish Long Positions
Volatility often accompanies uncertainty. This means the sideways trade which defined the soybean market for the past three months is likely ending. Soybean futures are oversold, managing a near-perfect 50% correction from the move that took prices as high as $16.67 per bushel in May. Our target is a bounce off current levels, and an eventual rally back to $15.00 per bushel.
RMB Group trading customers may want to consider re-establishing long positions in soybeans by buying May 2022 $14.00 soybean calls while simultaneously selling an equal number of May $15.00 soybean calls against them. Look for our $15.00 per bushel objective to be hit prior to option expiration on April 22, 2022. These “bull call spreads” cost $600 each as of Monday’s settlement. Pay no more than $750 each.
Your maximum risk is the amount paid for your spreads plus transaction costs. Each bull spread has the potential to be worth as much as $5,000 should May soybean futures settle at or above $15.00 per bushel at option expiration. Your maximum risk is the amount you pay for your spreads plus transaction costs. Exit all positions when and if our $15.00 per bushel target is hit.
Prices can and will change, so contact your RMB Group trading professional for the latest.
Exit All Remaining December Bull Spreads in Cocoa
Cocoa spiked to $2,792 per ton yesterday, just $8 short of our $2,800 target. We expected “another run to the top of cocoa’s multi-month trading range” when we suggested buying December $2,500 / $2,800 bull call spreads for $600 or less in late June. Cocoa has definitely done that, so consider our objective achieved – an $8 difference notwithstanding. Our December $2,500 / $2,800 bull call spreads June settled for $1,976 each on Tuesday. RMB Group trading customers should consider exiting all of their remaining bullish positions.
Data Source: Reuters/Datastream
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping our clientele trade futures and options since 1991. RMB Group brokers are familiar with the option strategies described in this report. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com. Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”
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The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
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