If you were to collect and place the fundamental data of the new crop soybean market on a weighted scale, the device would dip in favor of a bear market. On the March Prospective Plantings report, intentions to plant beans reached a record 81.493 million acres and the yields for North American Soybeans are leaning toward a "trendline" to higher than "trendline" potential due to ample moisture and minimal stress. The bull market that exists in old crop is supporting November prices and preventing a fall against the dominantly bearish picture as Brazilian soybean supply is plentiful and U.S. growing conditions are near perfect. Although we’ve seen a tighter balance sheet in the past, the stock-to-use ratio in old crop is what differs most from other years. The current stock-to-use ratio is at its lowest percentage on record, falling below 4% for the first time to 3.68%.
Even into this week, export sales are outpacing expectations and causing beans to rally. Old crop sales amounted to 317,157 tons while new crop sales printed 457,671 tons. The U.S. Department of Agriculture has estimated export sales for the 2013-14 marketing year to total 1.6 billion bushels. Commitments are now equal to 1.671 billion bushels. What is most notable in new crop, is the ratio against December corn along with the high implied volatility in November beans. The new crop soybean/corn ratio is near 2.79 (see chart below) and implied volatility in November is well above 20.
Taking a deeper look into the current soybean/corn ratio, we can see that it has been inching higher since early May and is approximately 14% higher than June 2013 levels. The major distinction so far has been the supply situation; corn stocks have been rising for nine years and 2015 will be no exception as the feed rate is expected to fall as well. China has raised their corn output estimate to 223 million tons while lowering their import estimate by 500,000 tons. Overall, the global picture feeds the bears and assists in the possibility of a push towards $4.00.
It is important to remember that the weather risk for beans is a month longer than the risk for corn; we look for the ratio to drop before the Fall since beans are made in August.
At-the-money November bean implied volatility is currently more than 21%; actual volatility is near 10%. Due to the high differential between the current and historical vols, the odds of seeing a large drop in November volatility after the reports on Monday are high. There are a couple surprises possible on June 30 beginning with the corn stocks number. This is due to the huge variation in guesses amounting to up to 1 billion bushels. The second possible surprise may be in the carryout number for old crop beans that will be implied by the bean stocks number. November beans are lacking as far as the shock factor goes which is why we are expecting a drop in the current volatility.
Although a high risk trade, we think the way to profit from this situation is to sell November bean straddles or strangles.