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COMMODITY REVIEW AND OUTLOOK
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(November 6, 1997) SOYBEANS: SHORT TERM–Meal is leading the beans higher, due to reports that stocks are extremely tight and demand is still strong. There is also talk of commercial stopping of November deliveries. Reports that the El Nino effect is increasing may provide support. El Nino in the past has been associated with both droughts and flooding in Brazil, so the recent disruption to the planting schedule due to rain has been viewed with interest by the market. If Brazil should lose production, it could go a long way towards supporting higher bean prices, as demand thus far has been exceptional. However, Brazil's planting progress is only slightly below normal. Exports may begin to show a decline in the coming weeks due to the problems in Asia. Increasing supplies as harvest winds down may also keep a lid on any rallies. Traders should keep those possibilities in mind. Monday is the USDA Grain report. The range is from about 2.7- 2.8, with an average of 2.737. The real answer as regards the report is any number much higher or lower than the October may move the market, but close to the October report will probably be a non- event. In any case, trade market action, not report numbers. There is a distinct possibility that recent action was evening up for the report. Long term, it appears that higher prices are very possible, but with Brazil's increase in production plus the record U.S. crop, we will need to see ongoing strong demand or the actual presence of El Nino, rather than the will-o'-the-wisp El Nino has been so far.
RESISTANCE–Resistance basis January remains near 724, 733.
SUPPORT–Support basis January beans remains near 715, 711, 705, 700, 690-695, 675-680.
RECOMMENDATION–Aggressive traders might sell January beans in the mid-low 720's with stops over 733 to reverse and go long. Use 10-cent stops or under 714 or 710. This is not a trade for everyone due to the upcoming USDA report. If we see a dip early, consider buying 710-705 with 5-10 cents stops. Look for a rally back to the low 720's, and short-term traders could contemplate reversing to the short side with the same stops or over 733. If more conservative, buy a break to the low 700's, upper 690's with stops of 5-10 cents or under 687. One way to play the report might be via expiring options. December grain options last trading day is on Friday, November 14. 240 meal calls are 3, 250 calls are .75, 240 puts are 5, 230 puts are 1.75. A trader might consider either buying an at the money put or call, or buying a 230 put and a 250 call. The multiplier for meal is 100 points equals 100 dollars, so the 240 meal call is $300, the 250 is $75 and so on.
The same bargains are available in the bean oil. 2500 calls are .60, 2550 are .31, 2600 calls are .15. 2550 puts are .35, 2500 are .25 and 2450 are .10. The multiplier for oil is 100 points equals 600 dollars, so the 2500 oil calls are $360, the 2550 calls are $186 and so on. These are strictly a way to play the report. However, if you are long or short the grains and are in a quandary about what to do, consider either changing to an option trade or hedging your play with a put if you're long, etc.
M. Steven Morgan
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