MRCI September 2015 Trade Review: Dec 15 vs July 16 Soybean Meal
This month we will be looking at the MRCI Dec 15 vs July 16 Soybean Meal futures bull spread trade. According to MRCI’s Spread Outlook report “Soymeal consumption is greatest during the cold of winter. Because soymeal can turn rancid, consumers cannot maintain large inventories. Thus, demand for meal soars during and after harvest, driving bull spreads during October.”
Trade: Buy Dec 15 Meal and sell July 16 Meal on 9/28 and exit 10/25. The suggested Protective Stop from MRCI $806 (see table below). The spread margin is $660. Average profit on winning trades in the past 15 years is $767.69. Worst drawdown in the past 15 years was $1140 in 2012.
- Hypothetical P&L Table
Below is the MRCI Hypothetical P&L table when entering this spread at the close of the start date and exiting at the close of the end date. Take a look at the “Worst Equity Amount” column – it was $1140 in 2012 but for the other 14 years it did not go beyond $500. When I look at the profit potential, I tend to remove the outliers. So in 2014 it was up $2400 and in 2003 it was up $2310. In many of the winning years the average profit ranged from $300 to $600 which I think is a more realistic target this year.
- 15 Year Seasonal Trend Chart
Below is the 15 Year Seasonal Chart. The thick black line is this year’s price and the blue line is the seasonal pattern. I usually like this year’s prices to follow the seasonal pattern, or be below the trend. I would like to see a pullback in this spread before getting in. I don’t think we will go from $4 to -$4 before the seasonal window starts (that is unrealistic in such a short time) but $1 or $2 lower would be nice.
- 15 Year Monthly Spread Price Chart
I always look at the monthly charts to get an idea of where these spreads have traded over time. During years of soybean shortages, this spread has gone much higher (see below in 2012, 2013, and 2014). I don’t think we will have a shortage like in years past, but we could see improved demand as the weather gets colder and animals need more protein.
- Daily Dec 15 vs July 16 Meal Chart
Back when the trade was talking about 500 and 600 million soybean bushel carryout, this spread traded under $0 to -$4.0. When the trade then realized 300 to 400 million carryout for new crop was more realistic, the meal spreads gained along with the rest of the soy complex. If soybean meal demand picks up, if the weather is colder and animals need more protein for feed, or if South America has planting issues, this spread most likely strengthens. It becomes a loser if the weather is extremely mild, or supply is much higher due to better than expected yields at harvest, or South America plants more acres than the record it is already expected to plant. There are absolutely no guarantees in trading, but I think the possibility exists that the bullish scenarios will work out.
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