Commodities Roundup: Soybean Special
October 16, 2009
Mid-October finds the US soybean harvest in its homestretch and as such, on hand supplies near what will probably be their highest levels of the year. It is not uncommon for soybean prices to make a seasonal low this time of year to reflect higher on hand supplies.
On the other hand, it is also not uncommon for prices to begin drifting higher after harvest as wholesalers begin to gobble up newly acquired inventories. In fact, a late cold snap in US growing regions has threatened the tail end of harvest, giving soybean prices a jump start on what is commonly attributed to "seasonal" strength.
Speculative weather rallies, however, have their limits.
Record production in the US and a projected record crop out of Brazil in 2010 should provide a considerable headwind to additional upside price action. The USDA's supply/demand report on October 9 showed 2009 US production topped 3.25 billion bushels while yields neared a new record at 42.4 bushels per acre. A day earlier, Brazil's CONAB estimated that nations upcoming crop would yield over 62 million tones of soybeans in 2010 - also a new all-time record for production.
Meanwhile, global ending stocks and stocks to usage, while not at records, remain hefty for 2009.
Figure 1
Markets tend to price in a worst-case scenario on weather news and then adjust later to reflect any real impact on crop conditions. As frost conditions in the Midwest were isolated and came late in the harvest cycle, this could be the case this year.
In other words, a seasonal post harvest rally in soybeans may have already occurred due to a weather scare. The markets tendency to move higher after harvest may be muted or at least hindered by already higher soybean prices and by the fact that traders will soon begin looking forward to price Brazils 2010 crop.
As fundamentals appear to be under equally balanced bullish and bearish influences, the soybean market may be presenting an ideal opportunity for strangling the market - especially given recent volatility.
A strangle is a strategy of selling both a put and a call at the same time. The put is sold far below the current price of the underlying futures and the call is sold far above the current price of the underlying futures. If the futures price is anywhere between the two strike prices at expiration, both options expire worthless and the trader keeps all premium collected as profit.
For our managed portfolios, we at Liberty Trading look to sell far distant strikes at 50% or more out of the money. You may wish to consider this strategy as well.
While the US dollar continues to play the wildcard role, balanced fundamentals should keep soybean prices from running too far in either direction. When selling strangles, that is generally the only requirement for success.
Figure 2: May Soybeans 2010
Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.
James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group/Optionsellers.com
Optionetics.com ~ Your Options Education Site
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