James Cordier, Michael Gross, OptionSellers.com
March 18, 2011
On March 10, the day of the USDA supply/demand report for US crops, I watched on my quote screen as every single commodities market we follow was red (lower) on the day. All but one.
There was one tiny green (higher) square on my screen.
While macroeconomics can move commodities as a group occasionally, these markets tend to "march to the beat of their own drummer" - at least more so than equities. Nowhere is this more evident than in agricultural markets where crop cycles, supply and demand can have an outsized effect on individual commodities.
US soybean stocks to usage ratio is at it's lowest level in 45 years.
This month's USDA supply demand report showed US ending stocks for 2011 at 140 million bushels - unchanged from last month but below most analysts estimates for an increase. Stocks to Usage ratio for 2011 (amount of US soybeans left over at the end of the crop year on Sept 1) was pegged at 4.2% - the lowest US stocks to usage ratio since 1965/66.
With such tight supplies in the US, global importers will have to turn to Brazil to fill the void. This will make prices all the more sensitive to any harvest related delays or yield rumors over the next 90 days. (The Brazilian soybean harvest begins in March).
Pressure now falls on Brazil to make up for the shortfall in US soybean stocks.
In addition, the March through May time period also marks the beginning of "planting season" here in the US. With high prices now in corn, wheat, soybeans an cotton, the battle for acreage will be intense this year. Many analyst now see soybeans as a potential loser in this battle as profit margins are now higher for corn and wheat. Weather related planting delays are also common in the springtime and prices can and often do become sensitive to them. This will be especially true this year with tight supplies on hand.
These seasonal factors are what traders often refer to as the "February Break" (price weakness that often precedes the anticipated new supply of Brazilian soybeans.) This break was extended in March as Soybeans sold off with the rest of commodities in light of the Japanese situation. However, speculation was that commodity longs were taking profits in grain markets to cover losses in equities and other markets - not because they feared any long term disruption in soybean demand. We would therefore view this pullback as a buying (put selling) opportunity.
We do not suggest betting on a weather rally or "post Japan bounce" in soybeans. Nor do we suggest a trade designed to profit from higher prices in soybeans at all. Rather, we recommend a strategy that can be successful as long as soybean prices don't collapse into an all out bear market. We suggest selling deep out of the money puts for summer and fall soybean contracts with the idea that tight supplies will continue to support the market through at least the springtime months. Any weather related rallies would be an added bonus (faster premium decay). We will be positioning managed accounts accordingly this month.
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