Highlights
Two Libyan ports have stopped loading crude oil due to protests calling for the Prime Minister to step down. National Oil Corp. on Sunday declared force majeure on loadings of about 130,000 barrels a day. Soybean acreage growth in the USA since 1980. Look at the Dakotas! https://twitter.com/i/status/1515100399975419904
Kory Melby is a former Minnesota farmer who immigrated to Brazil about 22 years ago and has become a consultant for everything agriculture. He wrote this yesterday (17 April 2022):
Sept 18th, 2018 November soybeans made a low at 8.12 per bu. At the time, the USA had one billion bushels of soybean carryover and China was sucking Brazil dry as quickly as possible. (Peak Pessimism)
I would think in the next 60-70 days, we should be reaching "Peak Optimism".
By June 18th, 2022, 45 months will have elapsed since the 8.12 low. November beans are toying with 15.20 per bu and the recent high has been 15.55 per bu.
The 2008 high in Nov soybeans was 16.36 per bu on July 3rd, 2008. 2022 is 14 years from 2008. A "doubling" of the 8.12 low is 16.24 per bu. The 2012 high in SX beans was 17.89 per bu. Are we headed there again?
Well, the stage is sure set. With 35 million tons lost in South America and the war in Europe, if there is a chance to check out the old record high prices, it is in the near future.
Brazil's 2nd crop is in good shape. Mato Grosso will produce a record large corn crop of 40 MMT+. If there are drought problems in the coming weeks, it will be in the Goias, MGDS, and Minas Gerias regions. At this time, I am not worried about 2nd crop corn. We have record planted area and most of it went in the ground 4-6 weeks earlier than last season. There was some late planted corn again this season. These acres are at risk, but nominal volumes in the whole scheme of things. Soybean planted area is puzzling to me in Brazil. Obviously, we increased area year over year. Conab says we are at 40.8 million hectares of soybeans in 2022. There are analysts that believe the real planted area is closer to 43 million hectares. Given the cost of production for 2023 soybeans, I doubt Brazil will expand soybeans for the next season. However, if more acres are found, that will look like Brazil is increasing year over year. There are up to 1.5 million "ghost soybean hectares" in Brazil. If Conab and others increase their soybean planted area again for 2023, I would argue that those same acres were planted during this past season too. I will continue to argue that this past season's crop likely had a larger starting point than what has been in the media. We need to keep this in mind as we look to 2023. We maybe should penciling in 148-150 MMT for Brazil for 2023 and not numbers closer to 140. I cannot prove this. The only data point I have that supports this argument are the fertilizer volumes delivered to producers in 2021. The amounts were up 12-14% Year over Year. For 2022, we will likely see fertilizer decreases of 20% Year over Year. If the Brazil farmer can apply some extra "lime" or calcario, he can buy some time before the lack of fertilizer affects his productivity. It is paramount that the USA produces at least an average crop of soy and corn for the year ahead. If we have any hints that the current crop will come in below trend line, it will be difficult for the world to "catch up" again regarding global stocks of corn, soy, and their derivatives. If I had to guess as to how things play out in the coming months, it would be something like this: Wheat, corn and soybeans make a significant market top by the 4th of July, 2022. We have a multi-month sell off and form a new base at higher levels. We then rally again into February 2023. This bull market commodity story is likely to last until early 2024. The trend should continue upwards with periodic 3-6 month sell offs. Back in November, I was saying you need to be a bull here. I was shitting bricks at the time. As we get into June, I need to pivot to being a bear, and yet again, I can see myself shitting bricks once again. As Top Gun II is finally ready to come out, I feel like I have been waiting for this movie for three years !!!!. I think the soy, wheat, and corn markets are about to experience a higher level of G-forces. Strap in and have a puke bag handy. We will likely need it this June and July. For more info: www.brazilintl.com Thank you all. Kory
Put Options Lesson, part 2
Last week, September wheat futures settled at $11.01. People were paying 59 cents per bushel for the right to sell September wheat futures at $10.00 and 26 cents for the right to sell September wheat at $9.00.
Why would anybody pay so much money for the right to sell September wheat $1.01 and $2.01 below the current price?
Why not just sell the September wheat futures at $11.01 and not spend $2,943.75 for the right to sell September wheat at $10? No brainer, right? Well, yes and no.
Currently, one has to have $4,730 in their futures account to sell (or buy) one 5,000 bushel wheat futures contract. That is $1786 more money tied-up than to buy the $10 put; i.e. less cash is tied up to buy the $10 put than to sell futures at $11.01.
If September wheat moves higher, the put option declines in value, but you already paid full price for the put, so no one will require you to cover the loss. With the futures position, the initial margin deposit of $4,730 is really a down payment on $55,050 worth of wheat (5,000 bushels times $11.01). If wheat goes up 1 cent, that $55, 050 worth of wheat worth increases to $55,100 (1 cent times 5,000 bushels = $50). In which case the buyer of wheat futures at $11.01 now has $50 added to his account. Guess where that $50 comes from? From the trader’s account that sold September wheat at $11.01; in this example that would be your account! In that case, you have lost $50 in the futures market.
What happens to the premium of the $10 put if wheat futures price goes up 1 cent? Well, of course it lost value, but only 31 hundredths of a cent. How do we know that? Because the Delta of the $10 September wheat put on April 14th was 0.31. The chart below is the same we sent yesterday, namely last week’s closing put option numbers for September wheat. The delta column at the $10 strike price says 0.31 (=0.31%). The delta of an option is the percentage of the price change of the option premium for each 1% change in the price of the underlying futures contract. Had September futures price lost one cent, likewise, the value of the option would have increased only 31 hundredths of a cent.
Why would the option premium increase if futures lost one cent? Think about it! This is not rocket science. The buyer of the put buys the right to sell futures at the strike price. As the futures price declines, the strike price never changes and more people are willing to pay up for every put option.
The reason the $10 put option premium changes about one-third the rate of the futures is because the $10 put option is $1.01 out-of-the-money; meaning, if that put was exercised (exchanged for a futures contract), the resulting futures position would be losing $1.01; the futures short (sold) position would be $10 (the option’s strike price) with the futures price at $11.01.
Tomorrow, we will compare the September futures price change versus the value of the $9 and $10 put options. Right now, September wheat is up 16¼ cents. the trader who sold wheat futures has lost $812.50.
About how much did the owner of a $10 put lose so far today?
About how much did the owner of $9 put lose so far today?
If wheat goes to $25 this year like it did in 2008, would you rather own a put option or the short (sold) wheat futures?
Market Data
This morning: Crude oil is at $107.22, up $0.27 The dollar index is at 100.65, up 0.33 July palm oil is at 6,405 MYR, up 85. The contract high was made March, 9th at 6,531 MYR. Palm oil owns 36% and soybean oil owns 28% world market share. December cotton is at $123.12, up $0.64 per cwt. The contract high was made April, 14th at $124.36 per cwt. Cotton competes with soybeans and corn for acres. July natural gas is at $7.725, up 0.224. The contract high was made today at $7.759. Natural gas is the primary cost to manufacture nitrogen fertilizer. July ULSD is at $3.5315 per gallon, up 0.0291. The contract high was made March, 9th at $3.7675. ULSD stands for Ultra Low Sulfur Diesel.
Rain Days Update
The Western Corn Belt has 10 less rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 1 more rain days than yesterday.
