MRCI March 2016 Trade Review: Dec 2016 Soybean Oil vs. Dec 2016 Soybean Meal
MRCI generates 15 seasonal spread ideas every month. For our clients at Daniels Trading who are also subscribers to MRCI, we encourage and help traders learn how to use the MRCI web site and also learn about the other factors that go into seasonal futures spread trading. Seasonality is only one factor in futures spread trading, though at times it can be a very significant force. While seasonality does play a hand in futures spread trading, other market conditions may cause the spread to trade higher or lower regardless of seasonality. At Daniels Trading we like to add additional commentary and analysis to seasonal futures spreads so traders can evaluate these trades and determine if they are right for their account. This report is an example of the process we go through when evaluating seasonal spread trades. At the end of these reports it is very possible you may have more conviction for the trade then before or you may want to take a pass.
This month we will be looking at the MRCI December 2016 Soybean Oil vs December 2016 Soybean Meal. This is an inter-commodity spread because it is a spread trade between two different markets. If you would like to know more about the different kinds of futures spreads like bull, bear, and inter-commodity spreads then please read our Basics of Futures Spread Trading blog article.
The seasonal window for this spread is from March 22nd to April 13th. The suggested seasonal window does not have to be followed by the exact dates. It is more of a guide than a hard rule. The seasonal window typically exists for fundamental reasons, and according to MRCI the spread has seasonal patterns because “When US processors slow their rate of crush in the spring, supply pressures ease on soyoil stocks of which had built throughout winter as if a mere byproduct. Nevertheless, as corn planting gets underway in mid-April, this spread has typically reversed in favor of soymeal. Be alert!”
Fundamental Analysis: Soybean Meal has been in a bear market along with Soybeans since last summer. Soybeans and Soybean Meal have transitioned from a market with tight stocks to a market with adequate to burdensome stocks. Soymeal is now plentiful in the US and South America at lower prices. To make matters worse for soy we could have another record crop in South America this year. If the US plants 83 million acres as the USDA is estimating and we have an average yield, priced could go even lower for Soybeans and Meal. Current fundamentals have a bearish bias for soybean meal.
Soybean oil has been in a bull market since last summer because of Palm Oil production shortfalls. El Nino brought hot and dry weather to Southeast Asia in 2015 and that has caused tighter palm oil stocks. Soybean oil is a substitute for palm oil as they are both vegetable oils. That has helped soybean oil prices as demand is higher for bean oil due to the palm oil shortage. The effects of El Nino on the Southeast Asia supply could last into the 2016/17 marketing year. Current fundamentals have a bullish bias for soybean oil.
Historical Technical Analysis: The chart below from MRCI shows the 15 year seasonal trend (thin blue line) and the current spread price (thick black line). As you can see below the current market is ahead of the seasonal trend. This is because soybean oil has been trending higher since August 2015 and soybean meal has been trending lower since July 2015.
MRCI 15 Year Seasonal Trend Chart:
Historical Performance: According to MRCI the Dec Oil vs Dec Meal spread has been a winner 14 out of 15 years when entered on the close of March 22nd and exited at the close of April 13th. The spread has drawn down as much as $2250 during the window and winners can range from $24 (2003) to $3314 (2007). It is important to note that since 2007 this spread has wider P&L ranges. This is primarily due to the volatility in soybeans and how China has driven prices as a major buyer of the soybean complex.
MRCI 15 Year Hypothetical Profit & Loss Table:
Monthly Chart Analysis: This next chart from MRCI shows the prices of the Dec Oil vs Dec Meal spread since 2002. From 2002 to 2006 we had a moderate range of prices which reflects a time in the grain markets before the ethanol mandates took hold of the corn and before Chinese demand dominated the soybean market. The years between 2007 and 2015 have larger ranges as demand for soybeans has increased as well as periods of very tight supply due to drought. Turner’s Take Ag believes we are now in a new period for the soybean complex where we eventually head back into the range from 2002 to 2007 for a few years. The market has plentiful soybeans stocks and will most likely add to these stocks in 2016/17. Soybean oil will continue to be in demand due to El Nino’s impact on Southeast Asian palm oil production.
MRCI 15 Year Monthly Chart for Aug vs Dec Soybean Meal:
MRCI Trade Methodology: Traders that want to participate in this trade while following the MRCI methodology should look to get into this spread on the close of Tuesday March 22nd and exit on the close of Wednesday April 13th. MRCI also suggests a “Stop on Close” of $1007.
|Long Dec 2016 Soybean Oil/Short Dec 2016 Soybean Meal Trade Summary|
|Long||Dec 2016 Soybean Oil|
|Short||Dec 2016 Soybean Meal|
|Margin||$1430 per spread|
|Spread Window||3/22/16 -> 4/13/16|
|Suggested Entry||March 22nd Close|
|Suggested Exit||April 13th Close|
|Each tick $0.10 in Soybean Meal = $10|
Each tick 0.0001 in Soybean Oil = $6
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