It used to be that for soybean price analysis, the US crop and growing season was the whole ball game.
Not anymore. Brazil overtook the US earlier last decade as the worlds #1 producer and exporter of soybeans.
As Brazil's share of the soybean export pie has risen, Brazilian crop development has had an increasing level of influence on price direction.
For seasonal analysis, this brings a factor into play that can be exploited if you know what you are doing. Being in the southern hemisphere, Brazil’s growing seasons are opposite of those in the US and the rest of the Northern Hemisphere. Thus, much like coffee, soybeans grow from November through April or so, when harvest typically begins. Unlike coffee, however, soybeans are planted anew every year and harvested later, making the crop more reactive to weather scares.
A persistent dry spell in Argentina and Southern Brazil has left soybean traders rattled and watching closely for weather breaks. Argentine soybean production has already been shaved by 3 million tons. But Brazil is the behemoth when it comes to soybean production and the key time for that crop will be early February. Continued dry weather could add moderate to substantial price support in the coming weeks.
But as option sellers, we don’t bet on weather, do we? (For new readers, the answer is “no.”). As option sellers, we only bet on least likely situations not happening.
True, we are very keen to the idea of taking soybean put premium this month but not because of South American weather. That could only help our trade.
We like selling soybean puts because of a demand story.
Winter: The time for feed
Soybean meal is a primary ingredient in animal feed throughout the world. In the US, meat livestock (such as cattle) must be brought out of the grassy pastures in the winter and put “on feed” as it is known in the industry. Consequently, as winter goes into full swing, demand for animal feed and thus soymeal tends to soar in the US. As global economies continue to develop, this tendency should become more pronounced as demand for meat has been a byproduct of a new middle class in China and elsewhere in the developed world.
Winter time means cattle eating soymeal on feedlots, not grass in the pasture.
Regardless, this winter demand surge for soymeal has often been reflected in soybean prices throughout the US winter. While past performance is not indicative of future results, soybean prices have traditionally begun to strengthen into February and continue into the springtime months.
Conclusion and Strategy
After achieving post harvest lows in December, soybeans prices have begun to climb again as winter begins in earnest. While Brazilian weather may be a catalyst for higher prices, US demand will be a floor that keeps prices from falling much further. As put sellers, that’s all we need.
May 2012 Soybeans
Look to sell May puts on any weakness in soybean prices this month. We like taking premiums of $500 - $600 per option on strikes below the December lows. The Fed's latest announcement to keep rates low should be supportive to commodities and only help this investment.
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