Short crops have long tails, that’s what the old salts tell me. Because of the tremendously short soybean crop from last year, I think the tail has one more wag before the 2012 crop is history.
The money flow in Soybeans has been very negative since the “rumor” that China will be using beans from their reserves over the short term, rather than going to the US export window. Since last week at this time, the August soybean futures contract (first notice day tomorrow) sold off from 1530 to 1330. Meal is off almost 80 dollars per ton. This was a basis/cash-led move as elevators from Des Moines to New Orleans dropped their offers dramatically.
The soybeans COT report showed that almost 50,000 soybean contracts were liquidated from the long side by non-commercials. Fast forward one week and the “rumor” still persist. China has confirmed nothing and has actually been quite active in the new crop soybean markets since the market has broken. Chinese importers have a fantastic way of talking the market down and then stepping in and making a big purchase. I think they are going to that playbook again.
Regardless, even as the futures markets have come down, the basis has maintained its strength on the board. August cash prices are flirting with 14 again and are almost 1.50 over the November contract. The cash markets have been very strong throughout the summer as May, July and soon August have been rallying into delivery. This tells me no one has beans with which to deliver.
As of right now there is some trepidation out there that September will fall into November because of the harvest that is approaching. Traditionally Sep is not a buy this time of year because there is usually excess selling done in old crop to clean out the bins.
I think this is false thinking because much of the bean crop this year was planted late and the bins are clean already. The southern boys I speak with won’t be harvesting beans until early September. Throw in weather risks and crush margins that still support crushing beans and we have the potential for an early fall squeeze. A squeeze I would very much like to play from the long side.
I could simply buy September beans alone, but to help cover myself, I will use a futures spread – Buying Sep Beans/Selling November Beans. This should cut the profit potential should September Beans take off to the upside, but it should also cut the risk as well. The maintenance margin on a spread like this is 500 dollars while the maintenance margin on a straight Sep contract is 3400.
Here is the trade:
Buy 1 September Soybean / Sell 1 November Soybean at 46-0
Risking to a CLOSE below 35-0. This is approximately 11-0 cents before fees (if this spread is below 37-0 when the market closes at 1:15 central, I will exit on the open of the next session.)
Initial Profit target- 80-0
CRUSH MARGINS- Very positive for September, right now
SEPTEMBER BEANS – NOVEMBER BEANS
Call or email with any questions, I can help customize this type of idea to fit your risk parameters.
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