USDA Crop Report, Harvest Season Mean Bearish Opportunities for Soybean Option Sellers

USDA Crop Report, Harvest Season Mean Bearish Opportunities for Soybean Option Sellers
Aug

18

2016

USDA Crop Report, Harvest Season Mean Bearish Opportunities for Soybean Option Sellers

Soybeans have not yet priced the 2016 Harvest, creating call selling opportunities now

Last week’s USDA Supply Demand report for soybeans confirmed what some soybean traders have suspected for some time. Despite what bulls deemed “adverse weather” earlier this summer, the 2016 US soybean harvest will be a record. According to the USDA, US soybean fields will yield 4.1 billion bushels of soybeans – a new all time high. This will result in a 2016/17 US Soybean ending stocks figure at 330 million bushels and a stocks to usage ratio of 8.2% – both the highest in a decade. (To learn more about the importance of ending stocks and stocks to usage ratio in grain price forecasting, chapter 14 of The Complete Guide to Option Selling, 3rd Edition)

US Soybean Ending Stocks vs Stocks/Usage Ratio

A record 2016 US Soybean harvest will result in the highest ending stocks and stocks to usage ratio in a decade.

Effect on Prices

Soybean prices, curiously, have held relatively steady in the wake of the report. Bulls argue this is because the report was already “priced in”, that demand is brisk, and that the soybean crop is not yet “finished.” We think it is a result of stubborn bulls, still holding out for the bad weather they so desperately hoped for this summer – got a taste of in June – and then watched in vain as their profits dissipated. Make no mistake – This is a bearish development for soybeans. You may argue brisk demand. But demand is factored into ending stocks. You may argue the crop is not yet in the barn. But the crucial “podding” period for soybeans, when the crop is said to be “made” is has all but wrapped up – to a quite successful conclusion. Weather reports for much of the Midwest for the remainder of August are widely cool and wet – an ideal condition to finish out the crop. In addition to these fundamentals, soybean prices have another challenge in the weeks ahead.

Seasonal Tendencies Spell Trouble

As the soybean harvest begins in September, new supplies begin to accumulate. Economics 101 dictates that when supplies are highest, price should be lowest. The soybean market has tended to adhere quite strictly to this principle in years past. As supplies begin to build in September, prices have tended to plummet. While past performance is not indicative of future results, we have no reason to believe a similar price decline could not occur this year as a result of new supplies being harvested

Mar Soybeans(CBOT) 5 year Seasonal(12-16)

Soybean prices have tended to decline in September as the new harvest causes on hand supplies to surge.

Conclusion and Strategy

With the 2016 US soybean crop expected to be an all-time record and ending stocks pegged at the highest in 10 years, soybean fundamentals appear decidedly bearish. Yet prices, while off summer highs, appear to have not yet priced the impending new supplies. Historical tendencies suggest that harvest price declines typically do not begin until September when the new crop is harvested.

March 2017 Soybeans

March 2017 Soybeans

  Selling the March Soybean 12.40 Calls
While a price decline is not guaranteed, OptionSellers.com believes, at the very least, soybean prices will have a difficult time trending higher with such fundamental and seasonal headwinds bearing down. For that reason, we suggest considering selling call options as a high probability strategy to take advantage of potential harvest price pressure. We’ll be pricing a series of strikes and strategies for our clients over the next 10-14 days. Non-clients can consider selling the March Soybean 12.40 calls for premiums of $500 + on any price strength in late August. For more information on managed portfolios visit www.OptionSellers.com/Discovery or call 800-346-1949 for a free information package.
James Cordier is founder of OptionSellers.com, a wealth management firm specializing exclusively in option selling portfolios. His book, The Complete Guide to Option Selling, has been featured on CNBC, Fox Business, Bloomberg Television, Forbes, and Morningstar Advisors.
  1. Hi. I would like to know where one can get fundamentals news regarding coffee.
    Thanks.

    • Michael Gross Says:
      September 8, 2016 at 3:01 pm

      Dear William,
      We recommend subscribing to all of the major financial news wire services such as Reuters, Bloomberg and Dow Jones News. These can often be subscribed to through your brokerage or a private quote service (such as CQG). I also recommend the USDA ag attache’ reports available at http://www.USDA.gov. In addition, there are several private research services and coffee letters that you can subscribe to that I will not list here – but can easily be found with a Google search.

      Good luck in your trading.

      Regards,
      Michael

  2. Dear Sir,

    I have read the 5 Crucial Keys and now reading The Option Selling Solution. I am interesting to do Selling.
    May I know where I can see the Commodities option premium quotation? And is it possible to check up the Open Interests?
    If yes, could you give me a link?

    B.regards
    Freeman

    • Michael Gross Says:
      August 25, 2016 at 4:16 pm

      Dear Mr. Freeman,

      Many option brokers that deal with stocks also have a commodities screen for options. OptionsXpress and Interactive Brokers come to mind. I believe sites like Barchart.com and BidTrends.com might also provide some. However, if you intend to trade full time for yourself and you want the most reliable, accurate and complete data, I’d recommend subscribing to a private service. We use CQG systems here in the office. However, there are other less expensive services available.

      Best wishes,
      Michael

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