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Market Plus: Mar 21, 2003

posted on March 21, 2003


Market Plus: Mar 21, 2003

Sid Sprecher: Welcome to Market Plus. This is the March 21st edition of Market Plus and with us is Virgil Robinson. Virgil, we're going to talk about two commodities, one is cotton and the other is soybeans and they have somewhat of a symbiotic relationship, at least in the trading bits.

 

Virgil Robinson: Both are oil bearing seeds, Sid, and in that context the demand for oil based upon the recent USDA revision in supply, U.S. oil supply as well as global oil supply, has certainly led the soybean complex. It's been my experience, Sid, however in the last number of years, the best leader in a bull soybean market is not in fact oil but rather meal and meal is really struggling.

The meal basis across the country has weakened in the last ten days, the spreads between futures contracts has widened or weakened. Both of those are pretty solid indicators that supply is in excess of demand and that's not particularly bullish news for soybean flat prices. Oil is, it's great that oil has in fact improved in price but I don't think it's the best leader which leads me to this point, Sid, with the onslaught of the southern hemisphere's crop soon to develop and historically from about mid March forward in each of the last three or four years, soybean inspections out of the United States virtually hit the wall and begin to decline very significantly.

I expect that to start developing as recently as this upcoming week. With that in mind it's going to be difficult for soybean, cash prices or futures prices, to move much higher unless we have significant weather problems. So, as mentioned earlier, I like the idea of using next week's little bump in bean futures because of the technical momentum we have, going ahead and finalizing old crop bean sales and repurchasing with that vertical call spread, total debit of about fifteen cents, you could make an additional thirty or thirty-five cents if August bean futures were to push back toward $6.20.

 

Sprecher: Take us through the mechanics of that spread real quickly.

 

Robinson: It's buying, in this instance, the at or near the money August call and simultaneously selling an August call, in this case the $6.20 which would be out of the money about sixty cents, there's a debit between the two. You pay more for the at the money call, you receive a credit for selling the out of the money call and the total debit is about fifteen cents in this case, Sid, which is about the expense of commercially carrying bean inventories at an elevator.

 

Sprecher: All right, protective way of storing it.

 

Robinson: Cotton, Sid, was your other question and a couple of things. We did obtain that sixty-dollar target in futures. But like in meal, I notice this week and it began actually last week, many of the interior buying points basis levels weakening, the spread, the cotton futures contract spread is weakening, both indicators of weakening demand. I think at this point in time futures are steep in value. They're about eighteen to twenty cents a pound higher today than they were a year ago and I understand that U.S. inventory or production is going to be down about three million bales year over year, global production down about nine million bales.

But as we approach that sixty-cent mark I think the market has fully factored in that supply realization. I think either the May or July, the old crop cotton futures, sometime between now and late June, will trade back towards fifty-four cents. I'd like to sell futures, either the May or July, preferably the July at sixty and then as the futures market pulls back down towards fifty-four, the basis should again strengthen and improve, that's when I'd sell my cash inventory and cover my short hedge. I think it could improve the return here on old crop cotton by as much as a couple of dollars a bale.

 

Sprecher: Thanks Virgil. This has been Market Plus.


Tags: agriculture commodity prices markets news soybeans