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2008 – The Year of the Soybean?

We've seen grains take their turn in the spotlight during the past few years. Back in 2006, wheat made headlines amid a crisis in Australia's wheat crop due to drought, putting a crimp in supply and sending prices soaring. This year started off as the year of corn, as everyone jumped on the ethanol bandwagon and farmers turned to planting corn at the expense of other crops. We saw corn trade up above $4.50 a bushel to a 10-year high in February, but it has backed off since then. Soybeans now seem to be taking their turn in the spotlight. We recently have seen soybeans reach three-year highs; we may see “beans in the teens,” ahead as prices crossed the $10 per-bushel threshold. Will 2008 be the year of soybeans? Maybe so. According to government statistics, soybeans are the second-largest crop in the U.S., with a value last year at $19.7 billion. Corn leads, with a value of $33.8 billion. While I think the biofuel boom may be a bit overblown, the food versus fuel debate remains on people's minds, especially with crude oil trading at record highs. I see that contributing to a continued bullish trend in corn and soybeans in 2008, unless something dramatic changes. Drought conditions have been seen in many key U.S. growing areas this season, and conditions in soybean power producer Brazil don't look ideal either, leading to tightness in global supply.

In addition, fund money continues to seek these markets, pushing prices up. By funds, I'm talking mainly about long-only investment vehicles that are backed by physical commodities, and hedge funds, which are speculating more and more in commodities as they look for new investment opportunities. I believe this fund interest should continue to inflate prices.

U.S. Dollar Impact on Grains

Don't forget the U.S. dollar. As the U.S. dollar has dropped to an all-time low against the euro, the price of grains has risen. Many commodities are priced in dollars, and a weak dollar makes our exports are less expensive for overseas buyers with increased purchasing power. Take a look at Charts 1 and 2 below and you can see the impact of the U.S. dollar on corn and wheat prices. Corn futures and wheat futures are in black, and the U.S. dollar index futures are in red. The inverse relationship is pretty clear to see. Pull up a chart for yourself of crude oil against corn and soybeans, and you'll see pretty clearly that in contrast to these charts, they are trading in tandem. As crude oil moved up to a record above $90 a barrel, soybeans rallied to three-year highs. Crude is one of those leader markets that impacts many areas of our economy, and should continue to drive the speculative biofuel boom in if it remains high. So if you trade grains, watch crude oil too.

 Chart 1: March corn futures black, U.S. Dollar Index futures red

Chart 2: March wheat futures black, U.S. Dollar Index red

Strategies: Bull-Call Spread

Now, how can you trade your market opinion of these and other commodities? If you have a small account and are at least moderately bullish on the prospects for commodities going forward, you might consider a bull call spread, often called a vertical spread. You would purchase a call option, and sell another call option in the same expiration month at a higher strike price. I call this a double-hedged strategy, as your risk is defined, but so is your profit potential. The price you paid for the call with the lower strike is partially offset by the premium you received from selling the call with the higher strike. You buy a call, and the other acts as a hedge if the market doesn't go your way. The maximum profit you could receive would be the difference between the strike prices of the long and short options, less the net cost of options, and your commission charges. While your profit potential is limited, your loss is defined. Your breakeven point is the strike price of the purchased call, plus your net debit paid.

In Chart 3, we have a yearly chart of March corn, and I've highlighted where the market took off from October 30, 2006, and where I'd place my options trades for a strategy for 2007/2008. I am looking at $4 corn calls for one side of your spread, which you'd pay about 16 cents for, a total of about $800 (at $50 per cent). Of course, these prices do change daily, so this is just an approximation based on current market pricing. You also need to add in your commission costs. To offset that cost, you can consider selling the $4.40 call for 9 cents, or about $450. The total cost to be bullish corn would be about $350, plus your commissions. I think this strategy is reasonable for the range this market is in.

Looking at March soybeans in Chart 4, I would consider buying $10.40 calls for 55 cents, or about $2,750 in cost, plus commissions. That might be a lot for you to spend on one option, so to offset that, you can sell the $10.80 call at about 40 cents. With this strategy, your total cost is approximately $750 to be long soybeans, plus your commissions. That's your maximum risk. What do you do with your position(s) if the market takes off like you expect? You can take profits, or move your options up if the market keeps advancing.

You might ask, why not just buy futures? That may be a good idea, but it's a more costly one if you aren't highly capitalized. Not only do you need to put up the required margin, but you have to weather ups and downs of the market, and you may get stopped out of your position. With options, you can take a long-term view and don't need to worry so much about the day-to-day or minute-to-minute market fluctuations.

Chart 3: bull-call spread, March corn

Chart 4: bull-call spread: March soybeans

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Bob Haberkorn
Favorite movie: Caddyshack

When you open your futures trading account at Lind Waldock, your #1 goal is to see a profit, but commodity trading presents many challenges to both the experienced and novice trader. Bob looks to employ his experience and market knowledge to help his clients accomplish their goals. He uses a variety of technical analysis methods, depending on the desired trading time frame. For short-term trades, his preferred method is the MACD with the relative strength index. For longer-term and option trades, he utilizes support and resistance along with volume and open interest.

His philosophy is to never chase the markets, always have a set entry and exit point based on the fundamentals and technicals, and trade with a defined risk ratio of 3 to 1. He also recommends using long and short options combined with futures to help hedge risk. You can reach Bob at 888-801-9302 or via email at rhaberkorn@lind-waldock.com.

You can also hear timely market commentary and trading strategies from Bob and other Lind Plus Senior Market Strategists through Lind-Waldock's weekly Markets on the Move webinars. These events are free to attend, and you can ask questions via live online chat. Sign up at www.lind-waldock.com/events.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

Futures trading involves substantial risk of loss and may not be suitable for all investors. © 2007 MF Global Ltd. All Rights Reserved. Lind-Waldock. Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.