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Soybeanmeal

15% to 30% Upside Ahead for Soybean Meal (Divergence Strategy)Soybean Meal recently confirmed the monthly bullish divergence with Septembers candle close. This is a significant signal that prudent traders should pay close attention to. What this signal implies is that there is a minimum 15% move to the upside from current price ahead for Soybean Meal. The high end target is a 30% upside move. This does not mean this market is going to go straight up from here. In my opinion, dips are for buying in the Soybean Meal market until we reach these upside targets. Have a great week.
CBOT:ZM1!Long
by Tradius_Trades
Inflation & Agricultural Prices - On the Rise Again Inflation is expected to rise again because the prices of staples such as wheat, rice, corn, and soybean meal have been increasing over the last two months. Additionally, we've seen a 20% increase in soybean meal prices since the low in February. Chicago SRW Wheat Futures & Options Ticker: ZW Minimum fluctuation: 1/4 of one cent (0.0025) per bushel = $12.50 Soybean Meal Futures & Options Ticker: ZM Minimum fluctuation: 0.10 per short ton = $10.00 Disclaimer: • What presented here is not a recommendation, please consult your licensed broker. • Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises. CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CBOT:ZW1!Long
by konhow
7
Could the premium get even beefier? In a previous article, "A Beefy Premium" , we delved into the growing divergence between Live Cattle and Lean Hogs. Since then, this disparity has only broadened. Currently, we're seeing a historic peak in both the absolute price difference (Live Cattle – Lean Hog) and the price ratio (Live Cattle/Lean Hog). To comprehend the drivers of this divergence, we need to explore the fundamentals of each sector. Beef: USDA economists, Russell Knight and Hannah Taylor, have noted that the repercussions of drought are still impacting calf production. The twin challenges of poor pastures and dwindling hay supplies have made it difficult for farmers to sustain their breeding stock. This has prompted a surge in beef cow culling. With anticipated feed price reductions on the horizon, we predict a tilt towards placing more calves into feedlots in 2024, constricting the cattle supply even further. Interestingly, despite the tightening cattle supply, demand remains robust. Beef cutout prices reached a pinnacle in October, with prices generally maintaining historic highs on a monthly scale. Seasonally, prices are also expected to rise slightly going into November due to a holiday boost. A possible explanation for this sustained demand might be the surge in US wages. Empowered with heftier paychecks, consumers are more able to splurge on beef, ensuring packers to keep up their slaughter pace. Pork: On the hog front, this quarter reflects a modest uptick in inventory. In contrast to the cattle market, the decline in headcounts here isn’t as pronounced. A noteworthy correlation emerges between lean hogs and soybean meal. With soybean meal being a staple in animal feed production, its price directly influences producer margins. Factors like the Russia-Ukraine conflict, US droughts, and surging demand for soybean meal have propelled its prices in recent years. Even though the current prices are tapering off, the Soybean Meal/Lean Hogs ratio remains high, signaling shrinking profit margins for producers. Moreover, compared to other commodities, the USDA's support for the Hogs and Pigs market has been relatively scant. Another point of concern is the prevalence of negative news in the swine industry, such as the European swine industry suffering substantial financial losses in 2023, leading to an 8.5% drop in production. Or bouts of African Swine Fever, threatening global supplies. Such events have the potential to threaten producer’s profitability significantly which could work its way into structural long-term decline in supply. But as of now, this remains to be seen. Overall: Current evidence seems to be pointing to a stronger preference for beef given the unwavering demand despite supply shortage and climbing prices. Basic economics principlesnudge producers to markets with higher profitability, which could work its way into an increase in participants leading to supply eventually matching demand. Although this movement, if it happens, does not occur overnight, it will eventually lead to a convergence in prices between the two markets in the future. There are also other reasons that need not be as drastic that point towards a convergence in prices in the medium term: expectations of Live Cattle supply should improve next year; the road to the maximum willingness to pay for Live Cattle is shorter now. Hence, to express our continued bearish bias, we could consider a short on the spread of live cattle to lean hogs. Given that both Lean Hog & Live Cattle Futures have the same contract unit of 40,000 pounds and price quotation of US cents per pound, we can trade the spread of the two contracts using a 1:1 ratio. This involves selling one live cattle futures contract at the current price of 185.725 and buying one lean hog futures contract at the current price of 68.025 giving us a spread of 117.7. Each 0.00025 increment is equal to 10$. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: usda.library.cornell.edu usda.library.cornell.edu beef2live.com www.cmegroup.com www.cmegroup.com
CME:LE1!Short
by inspirante
A technical overview of Soybean Oil Since our last analysis of Soybean Oil, the commodity has completed its head and shoulders pattern, now trading at the resistance formed by the previous neckline. Concurrently, we observe an RSI divergence, where the RSI prints lower highs while the prices chart higher highs. This divergence is generally viewed as a bearish indicator, hinting at possible price declines. When paired with decreasing volume, the case for price exhaustion at this juncture becomes more compelling. The Price & Volume Profile chart serves as another essential tool in pinpointing critical zones. The highlighted POC (‘point of control’) zone represents the price level with the highest frequency of trades. Historically, this has acted as a pivotal support and resistance level for Soybean Oil, demarcating regions of consolidation before prices venture either upwards or downwards. The chart also highlights the volume traded at the different levels as denoted by the volume number at the different price levels. Notably, the current price level showcases a significant volume zone, with the largest volume transacted there. Looking at the 50 & 200-day moving averages we observe a golden cross which signifies bullishness. But not on the 100 & 200-day moving averages. On a relative value basis, we can also compare Soybean Oil to its substitute, such as crude palm oil. Here we see 2 defined regimes pre-2021 and post-2021 where the ratio of the two products significantly increased, suggesting that Soybean Oil became relatively pricier than Crude Palm Oil. We have previously delved into this topic in our article “ Fading the Soybean Oil Premium ” where we anticipated a decline in this ratio. Subsequently, this ratio did correct to the 0.06 mark, only to experience a rapid rebound. This surge was attributed to Soybean Oil appreciating at a faster rate than Crude Palm Oil. Another metric involves contrasting Soybean Oil with its upstream and downstream derivatives: Soybean and Soybean Meal. Once more, we see prices tending to move in tandem until 2021, after which the ratio of Soybean Oil to both Soybean Meal and Soybean underwent a marked shift. With the ratio's support distinctly outlined by pre-2021 resistance, this ratio can be wielded as a metric to identify when Soybean Oil is relatively overpriced compared to its up and downstream products. In conclusion, a blend of technical indicators seems to point towards more downside for Soybean Oil, such as the RSI divergence and declining volume. Also, prices stuck in the POC have generally preceded breakouts and on a relative value basis, Soybean Oil seems over-extended. We can express this bearish view on soybean oil via a short position on the CME soybean Oil futures at the current level of 63.29, with a stop at 67.50 and take profit at 51.00. Prices are quoted in cents per pound and each $0.0001 increment per pound in the Soybean Oil futures contract is equal to 6.00$. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com
CBOT:ZL1!Short
by inspirante
Trading with Soybeans, Soybean Meal and Soybean Oil FuturesCBOT: Soybean ( CBOT:ZS1! ), Soybean Meal ( CBOT:ZM1! ), Soybean Oil ( CBOT:ZL1! ) This is the second installment on CBOT Soybean Complex. If you have not read the first piece, please click the link at the end of this idea. Let’s start with a discussion of two reports followed by soybean market participants. The Crop Report U.S. Department of Agriculture (USDA) closely monitors agricultural market conditions and publishes the monthly World Agricultural Supply and Demand Estimates (WASDE). WASDE, commonly known as the Crop Report, provides a global view of key agricultural products including wheat, rice, coarse grains (corn, barley, sorghum, and oats), oilseeds (soybeans, rapeseed, palm), cotton, sugar, meat, poultry, eggs, and milk. The Crop Report is the most important report followed by agricultural commodities traders. What’s the key takeaway from the April 2023 Crop Report on Oilseeds? U.S. soybean supply and use forecasts for 2022/23 are unchanged. However, relative to 2020/21, planted acreage is higher while export is lower. Global 2022/23 soybean supply and demand forecasts on lower production, crush, and exports. Global production in current crop year is reduced by 5.5 million tons. Overall, the April WASDE shows plentiful supply, weakened demand and higher inventory, the recipe for price trending down. CFTC COT Report Commodity Futures Trading Commission (CFTC) publishes the Commitments of Traders (COT) reports and provides a breakdown of open interest for futures and options markets. It categorizes the reportable open interest positions into four classifications: • Producer/Merchant/Processor/User: An entity that predominantly engages in the production, processing, packing, or handling of a physical commodity and uses the futures markets to manage or hedge risks associated with those activities. • Swap Dealers: An entity that deals in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swap transactions. • Managed Money: Commodity trading advisor (CTA) or Commodity pool operator (CPO). They are engaged in organized futures trading on behalf of clients. • Other Reportable: Every other reportable trader that is not placed above. What’s the key takeaway from the May 2nd COT report on Soybean/Meal/Oil Futures? o Soybean futures ZS open Interest: 601,051, down 4.7% from previous week; o Managed Money increased ZS short position by 80.1%; their long/short ratio is 2.1. Note that the ratio was 8.3 on April 18th. This indicates that speculative traders are no longer bullish on soybeans. o Soybean Meal ZM open Interest: 408,013, down 2.9% from previous week; o Managed Money decreased ZM long position by 22.3%; their long/short ratio is 3.7. Note that the ratio was 7.9 on April 18th. Again, this is a bearish signal. o Soybean Oil ZL open Interest: 472,547, up 0.6% from previous week; o Managed Money increased both long and short positions modestly; their long/short ratio is 0.7, the same with April 18th. Popular Soybeans Futures Trading Strategies – Explanation and Illustration There are different types of traders in the soybean futures market: Producers, Grain Elevator (Storer), Processor, Livestock Farmer (User), and non-commercial traders. We will discuss how they use the futures market, each with a hypothetical trade example for illustration purpose. Investor Non-commercial traders are not participants in the soybean industry. They hold a market view and hope to profit from such view through futures trading. Investors could draw ideas from futures price chart, the Crop Report, and other relevant market information. Case study #1: Directional Trade with Stop Loss Market information 1) April WASDE shows plentiful supply, weakened demand and higher inventory; 2) Following the release of WASDE, soybean price has been trending down; 3) News surfaced that Smithfield, the largest US hog producer, plans to liquidate 10% of its sow. This indicates lower soybean meal demand in the future. Trade Setup To express his market view, on May 10th, a trader sells one July 2023 contract (ZSN3) at 1412’6/bushel ($14.1275), which gives the contract a notion value of $70,637.5. He deposits $5,000 margin on his futures account. At 7.1% of the cost, he participates in the price exposure for 5,000 bushels of soybeans. The use of leverage, in this case by 14.1 times, is an advantage of cost-effective trading with futures contracts. Potential Profit and Loss 1) In June, ZSN3 declines to 1350’0 ($13.50), the trader would gain $3,137.5 = ($14.1275-$13.50) x 5,000. Using the original margin deposit as a cost base, this short futures trade would potentially realize 63% profit, excluding trading fees; 2) If the soybean market rallies to 1480’0 ($14.80), the trader would lose $3,362.5, or a return of -67%; 3) Our trader could set a stop loss at 1450’0 ($14.50), to cap the maximum loss at $1,862.5 and avoid margin calls. An outright trade with futures contract allows the trader to profit from a correct market view. Leverage built into futures could significantly enhance the profitability, while stop-loss could limit the exposure if the view proven to be incorrect. Soybean Farmer and the Production Hedge When a US soybean farmer plants the crops in April, he is said to have a Long Cash position. The farmer is exposed to the risk of falling soybean prices during the November harvest season. To hedge the price risk, our farmer could enter a Short Futures position now, and buy back the futures when he is ready to sell the crops. The effective sales price equals spot price in November plus gain/loss in the short futures position. Since the cash market and futures market are highly correlated, loss (gain) in the cash market will be largely offset by the gain (loss) in the futures market. Case study #2: Production Hedge (Short Hedge) Market information 1) The farmer planted 1,000 acres of soybeans in his Central Illinois farm; 2) Total production cost per acre is estimated at $859, which includes variable costs (seed, fertilizer, pesticide), overhead (building, storage, machinery) and land; 3) Yield per acre is estimated at 69 bushels. His cost per bushel will be $12.45; Trade Setup On May 10th, ZSX3 is quoted at 1254’2 ($12.5425). The farmer expects to sell 69,000 bushels. Since each ZS contract has a notional of 5,000, he needs to sell 14 lots of ZS contracts. Soybean basis in Greene County, Illinois is estimated at $0.20. The Hedging Effect 1) The farmer effectively locks in the sales price in April for his November soybean crop at: $12.5425 (futures) + $0.20 (basis) = $12.7425; 2) Production hedge helps our farmer to protect a profit margin of 29.25 cents =($12.7425 - $12.45) per bushel, or $20,182.5 for his entire crops. The farmer is left with basis risk. In the context of commodity futures trading, basis refers to the difference between the spot price of a commodity and the price of a futures contract for that same commodity. Basis risk is usually smaller than outright price risk. Grain Elevator and Futures Rollover Strategy After the crop is harvested, farmers or merchandisers usually store the soybeans in a grain elevator and wait for the right time and price to sell. Soybeans could be stored for a year but would incur monthly storage costs. The decision to store depends on whether expected future price gains outweigh the storage costs. A merchandizer is exposed to the risk of falling soybean price, which would cause his soybean inventory (old crop) to decline in value. To hedge the price risk, he could employ a rolling futures strategy. Case study #3: Rollover Front-month Soybean Futures “Rollover” refers to the process of closing out all positions in soon-to-expire futures contracts and opening contracts in newly formed contracts. The rollover process impacts market volatility, prices, and volume. Trade Setup 1) Sell 14 lots of July contract ZSN3 at 1412’6 ($14.1275) on May 10th; 2) At any point before expiration, if we decide to sell soybeans in the spot market, we could exit our futures position by buying 14 lots of ZSN3 at prevailing price; 3) If we plan to hold our inventory for a longer period, we will buy back ZSN3, and simultaneously sell 14 lots of August contract (ZSQ3); 4) ZSQ3 is quoted 1345’4 ($13.455) on May 10th. If you hold the soybean from July to August, you will incur extra storage cost, but would get 67.25 cent less per bushel. This is clearly very bearish. The Hedging Effect: Rolling futures positions allows our merchandizer to extend his hedge beyond original futures expiration. You may ask, why not use a longer-dated contract to begin with, say July 2024? This is because the front month contract is usually more liquid. It is easier to put the hedge on and off quickly. By sticking with liquid nearby contracts, we could avoid the cost of price slippage generally associated with less liquid deferred contracts. Soybean Processor and the Board Crush In soybean industry, “crush spread” is the market value of meal and oil byproducts subtracted by the cost of raw soybeans. In the cash market, the relationship between prices is commonly referred to as the Gross Processing Margin (GPM). In the futures market, the crush value is an inter-commodity spread transaction in which Soybean futures are bought (or sold) and Soybean Meal and Soybean Oil futures are sold (or bought). Soybean crush spread is also called the Board Crush. Case study #4: Soybean Crush Spread Trade Setup 1) The November-December Board Crush (buying November Soybean futures and selling December Soybean Meal futures and December Soybean Oil futures) is used to hedge new-crop gross processing margins; 2) CME Group facilitates the board crush that consists of a total of 30 contracts: 10 Soybean, 11 Soybean Meal, and 9 Soybean Oil; 3) Implied Soybean Crush (SOM: Z3-Z3-X3) is quoted at 172’6 ($1.7275) on May 10th. Each contract has a notional of 50,000 bushels and is currently priced at $86,375; 4) If we process 100,000 bushels a month, we would short 2 board crushes. On May 10th, the margin for this spread is $1,650 each. The Hedging Effect: Board Crush enables processors to lock in his operating profit. Livestock Farmer (Soybean User) and the Hog Feeding Spread Livestock farmers buy corn, soybean meal and other ingredients to produce animal feed. For example, hog farmers’ gross profit is represented by gross feeding margin, also known as the hog feeding spread, which is the value of lean hog less the cost of weaned pig, corn, and soybean meal. Therefore, hog farmers are exposed to the risk of rising ingredient costs. To manage price risks, they could trade the hog feeding spread, which isa long hedge by selling CME lean hog futures (HE) and buying CBOT corn (ZC) and soybean meal (ZM) futures. A typical hog feeding spread is expressed as: Hog Feeding Spread = 7 x HE – 3 x ZC – 1 x ZM Case study #5: Hog Feeding Spread Market information 1) USDA daily hog and pork report shows that cash market hog price averaged $73.59/cwt nationwide on May 9th, up 78 cents from prior week; 2) Cash hog is down 31.4% year-over-year. However, it seemed to bottom at $66 in mid-April and rebounded after the news of Smithfield sow liquidation. 3) Our farmer expects hog prices to rise faster than feed prices in the next few months. To capture an expanding margin, he plans to long the hog spread. Trade Setup: For every 280,000 pounds of lean hogs (approximately 1,120 pigs): • Long 7 lean hogs futures HEM3 at 0.84575/lb., giving a total notional value of $236,810, as each contract has 40,000 pounds (lb.); • Short 3 corn futures ZCK3 at 646’4 ($6.465)/bushel. Each ZC contract has 5,000 bushels of corn, leaving this leg of trade at $96,975; • Short 1 soybean meal futures ZMK3 at $415.0/short ton. Each ZM contract has 100 short tons of soybean meal, leaving this leg of trade at $41,500; • The combined total, $98,335, represents the gross margin of raising 1,120 hogs, or about $87.8 per pig. The Hedging Effect: It takes 5 months to grow a piglet to marketable weight. Factoring in breeding sows, the full production cycle for hog farmers could last 1-1/2 years. Pork prices and feed costs could vary significantly during this period. Hog Feeding Spread enables hog producers to lock in their operating profit. Spread Trading in CBOT Soybean Oil and BMD Crude Palm Oil Vegetable oils are the most crucial cooking ingredients in the world. Soybean oil and palm oil dominate the global edible oil marketplace with 2/3 of market share. Soybean oil and palm oil are considered substitute goods because food processors often switch between the two as the prices fluctuate. Soybean oil and palm oil are driven by different market fundamentals. World soybean production is centered mostly in the U.S., Brazil and Argentina, and most palm oil comes from Indonesia and Malaysia. A drought in the U.S. or in South America could drastically alter soybean oil supply one year, while disease in Southeast Asia could affect palm oil supply the next year. This can create tremendous volatility in the spread relationship. The CBOT Soybean Oil futures (ZL) consists of 60,000 pounds, equivalent to 27.22 metric tons. The BMD Crude Palm Oil (FCPO) futures contract is 25 metric tons (mt). Case study #6: Soybean Oil/Palm Oil Spread Observation: Soybean oil and palm oil markets have been in decline since July 2022. In the past two months, soybean oil drops by a faster rate compared to palm oil. There could be plausible cause for the abnormal trend. However, if the relationship were to reverses back to normal, the spread will be enlarged. If an investor holds this view, he could long the spread by buying CBOT soybean oil and selling BMD crude palm oil. Trade Setup • Provided ZL at $0.5255/lb. and FCPO at MYR 3570/mt with prevailing USD/MYR exchange rate at 4.46, the ZL/FCPO spread could be derived at: • ZL = $0.5255 (per lb.) x 2204.622 (lbs. per mt) = $1,158/mt • FCPO = MYR 3570 / 4.46 /mt= $800/mt • ZL/ FCPO spread = $1,158/mt -$800/mt=$358/mt Potential Profit and Loss 1) For an investor, a profit could be realized if the spread gets bigger. He would incur a loss if the spread narrows instead. The USD/MYR exchange rate could affect the trading result; 2) For commercial hedgers such as edible oil processors, hedging would allow them to maintain stable production formulas even though oilseed spot prices change unexpectedly. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CBOT:ZL1!Long
by JimHuangChicago
A Primer on Soybean Crush SpreadSoybeans are one of the most versatile and important agricultural commodities in the world, consumed extensively by humans, livestock, and industry. Soybean prices have an undeniable impact on the global economy and their importance is only increasing with the rapidly growing bio-diesel industry. In our previous paper Heavy Exports Weighing Down Soybeans , we described factors affecting the supply of Soybean and their seasonality. Supply is largely driven by harvest cycles and crop yields. Demand can shift for multiple reasons. Live stock feed, Cooking oil and Biodiesel form the largest demand source for Soybean. These are all derived from the two by-products of Soybean – Soybean Meal (“Meal”) and Soybean Oil (“Oil”)). During Soybean processing, the seed is crushed to separate the oil from the meal. These by-products can be traded as separate commodities. Traders can harvest gain from the shifting relationship between the by-products and soybean using the crush spread. This paper will describe the crush spread, its computational methodology, and the methods for investors to harvest gains from it. The paper will also look into the factors defining the crush spread in 2023. The Crush Spread The Soybean crush spread refers to the value of Soybean’s gross processing margin, which is the difference between the value of the outputs (Meal Price + Oil Price) and the value of the inputs (Soybean Price). The crush spread is traded on the cash and futures markets and is often used by Soybean processors to hedge their margins for the actual process. It can also be used to harvest gains from the shifting dynamics between Soybean and its byproducts. Factors That Affect the Spread The crush spread can be influenced by the price of soybeans, the demand for its byproducts and the cost of production. Production costs can vary due to energy prices, labor conditions, carryover stock, and health of supply chains. Demand for by-products is driven by some common factors such as macro-economic conditions but also by factors unique to each commodity. Meal is used for livestock feed while Oil is used as a cooking oil and as biodiesel. Livestock feed demand is driven largely by China to feed its large swine population. Like soybean supply, feed demand also shows high seasonality. Due to a shortage of grass in the winter, Soybean Meal is consumed during these months leading to higher demand. Additionally, unlike other commodities, Soy Meal cannot be stored for longer than 3 weeks. So, during the US harvest (October), Soy Meal prices plummet due to oversupply. Cooking oil demand is sensitive to the supply and price of Palm oil, which is also widely used for cooking. Both can be used interchangeably; they are the so called substitute products. So, the decision of which product food producers choose depends on prices, supply, and import/export policy decisions. Moreover, Soybean Oil is far more suitable for the production of biodiesel than Palm Oil. This is why Soybean Oil generally trades at a premium of $100-$150 tonnes to Palm Oil. In the US, Soybean Oil demand for biodiesel is even higher owing to a fast-growing renewable diesel industry. Shifting Dynamics of Soybean By-Products Downbeat Macro With recession risks and inflation running high in many countries, the macro-economic outlook is downbeat. This weighs on the demand for Soybean and its by-products, resulting in lower prices and a narrowing spread. China’s Reopening China’s reopening from pandemic restrictions last year is in full swing. Although initial recovery was sharp, conditions have started to cool due to downbeat macroeconomic conditions weighing on export demand and still weak domestic demand. China’s large swine population is a major driver of meal demand. Heading into the winter, in case domestic demand starts to recover, it would lead to far higher meal demand and prices resulting in a narrowing spread. Rising Demand for Soybean Oil In the past, crush demand was driven largely by demand for Meal, Oil was considered a surplus without enough uses. However, rising demand for green energy across the globe and tax incentives for producers have led to a sharp increase in demand for Soybean oil in the past few years, particularly in the US. Biodiesel production capacity nearly doubled between 2021 and 2022. Since then, markets have normalized with higher planting of crops and increased Soybean crushing capacity installed. Despite the downbeat economic conditions, demand for Soybean Oil is expected to increase 4.9% this year after surging 6.5% last year, according to the USDA. With higher demand for Soybean Oil, crush demand will also increase. This would result in a change in the price relationship between Meal and Oil as well as a narrower crush spread due to higher volumes. Harvesting Profit from Crush Spread Investors can take a position on the crush spread in a capital efficient manner using CME’s Soybean (ZS), Soybean Oil (ZL), and Soybean Meal (ZM) futures. CME offers margin offsets for a crush spread position using these contracts. In addition, the Soybean crush can be executed on CME Globex as a single trade. Each of these 3 contracts are quoted in different units. ZS is quoted in cents/bushel. ZM is quoted in dollars/short ton. ZL is quoted in cents/pound. As such, in order to calculate the value of the spread, the price of each contract needs to be converted to cents/bushel. A bushel of Soybean (60 pounds) yields 11 pounds of Soybean Oil and 44 pounds of 48% protein Soybean Meal. The conversion factors are given below Soybean Oil per bushel: ZL Price x 0.11 Soybean Meal per bushel: ZM Price x 0.022 Crush Spread ($/bushel) = (Soybean Oil per bushel + Soybean Meal per bushel) - ZS Price/100 As per each contract's exposure size, a long crush spread position using CME futures comprises long eleven (11) Soybean Meal futures contracts, long nine (9) Soybean Oil futures contracts, and short ten (10) Soybean futures contracts. This position would normally require a margin of $67,625 for the nearest month contracts. However, with the 88% margin offset, investors can go long on the crush spread with exposure to 50,000 bushels for just ~$8,115 in margin. Alternatively, investors can also get direct exposure to the crush spread using CME’s options on the Soybean Board Crush Spread. Each contract gives exposure to 50,000 bushels. Example Trade Like Soybean prices, the crush also shows seasonality. This is due to the combined seasonal effects of Soybean and each of its byproducts. In our previous paper, we highlighted that Soybean prices are at their lowest in October due to the US harvest. Due to a low input cost (Soybean price), Board crush expands during this time. The same uptrend can be seen during the summer months representing the harvest from Brazil and Argentina. It should be noted that seasonal trends are not a guarantee as other factors can have outsized effects on markets. A long position in the Board crush would represent a short position of 10 Soybean contracts and a long position in 11 Soybean Meal contracts & 9 Soybean Oil contracts. As an example trade, consider the board crush in Jan 2019. Going long on the board crush on 9th Jan with an entry level of USD 1.02/bushel and an exit at USD 1.37/bushel would yield 34% profit. However, investors should note that the board crush value is highly volatile, as it is derived from three volatile underlying drivers. So, stop loss needs to be adjusted for the high volatility. Positions on 9th Jan: ● Short 10 ZS1! at entry level of 924 c/bushel ● Long 11 ZM1! at entry level of USD 323.4 /short ton ● Long 9 ZL1! at entry level of 28.6 c/lb Note that the crush declined to 0.91 on 15th Feb representing downside of 10.7%: ● ZS1! at price level 921.5 resulting in profit of USD 1,250 ● ZM1! at price level 310.5 resulting in loss of USD 14,190 ● ZL1! at price level 29.95 resulting in profit of USD 7,290 Net loss: USD 5,650 Crush started to rise in April and peaked at 1.37 (+34%) on 30th May: ● ZS1! at price level 877.85 resulting in profit of USD 23,075 ● ZM1! at price level 327.4 resulting in profit of USD 4,400 ● ZL1! at price level 27.8 resulting in loss of USD 4,320 Net Profit: USD 21,155 Key Takeaways 1) Board Crush or the Crush Spread represents the Gross Processing Margin (GPM) of crushing Soybean into its by-products as quoted by cash and futures markets. 2) Board Crush allows traders to replicate the Soybean Processing Value Chain. It enables traders to harvest gains from changing crush margins while enabling crushers to hedge their GPMs. 3) Board crush can be volatile which requires astute risk management while trading it. 4) Trading board crush using CME futures is margin efficient due to substantial margin offsets (88%). MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CBOT:ZL1!Education
by mintdotfinance
6
Fading the Soybean Oil premium.Jumping straight into the technicals, we see a head and shoulder pattern on the daily Soybean Oil chart. With the neckline now broken, it seems a bearish set-up might be possible. While the technicals are important, understanding where the current price level of soybean oil is in context to other products could help us build further conviction on this idea. Firstly, the Soybean crush components. Currently, Soybean Oil trades at a pretty large premium against Soybean and Soybean Meal. Looking at the price ratios of Soybean Oil/Soybean & Soybean Oil/Soybean Meal, we also see that both have been trading out of the ‘normal’ range since 2021. With both ratios now trending lower and knocking on the door of the normal range again, we will watch closely to see what happens as we approach this critical juncture. Secondly, Soybean Oil vs its substitute, Crude Palm Oil. Again, we see Soybean Oil as the outlier here, as prices diverge from Crude Palm Oil, with Soybean Oil trading higher. Looking at the bottom chart, we can clearly see the Soybean Oil/Crude Palm Oil ratio deviating from the average range established in 2018 – 2021. With this ratio recently trending lower, a break below the upper level of the range established (dotted line) could accelerate the closing of this premium, as seen in the 2021 to 2022 period, where the ratio collapsed swiftly. The technically bearish setup, coupled with Soybean Oil’s relative valuation against the soybean complex and Crude Palm Oil on fundamental standpoint, makes a decent case to short Soybean Oil Futures from here. To express this view, we can consider setting up the trade in a few ways: 1) An outright short on Soybean Oil using the CME Soybean Oil Futures, at the current level of 60.05, setting our stop at 67 and taking profit at 42, with each 1-point move in the Soybean Oil Futures contract equal to 600 USD. 2) A spread trade between Soybean Oil & Crude Palm Oil, by taking a short position in the CME Soybean Oil Futures contract and a long position in the CME Crude Palm Oil futures contract. Such a setup could potentially allow you to stay profitable even if you turn out to be ‘wrong’ in your market views if it eventually proves that crude palm oil has been underpriced and the soybean premium is closed by crude palm oil rallying. For this trade, it is trickier to set up due to the contract size and tick value difference. Interested readers can check out one of our previous ideas where we have covered this trade in further detail: The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com www.cmegroup.com www.cmegroup.com
Editors' picks
CBOT:ZL1!Short
by inspirante
15
Will lean hog catch up?The commodities market is a close-knit one, with the price hike in one commodity often affecting another. Such correlation is evident in agricultural products such as soybean meals, corn, and lean hogs. Lean hog prices are highly correlated with Soybean Meal and Corn as young feeder pigs are fed a diet of roughly 70% corn and 30% soybean meal. As such when corn and soybean prices rise, lean hog prices often follow suit. As spelt out in some of our previous ideas , we think agricultural commodities are due for a rally amid the backdrop of supply chain constraints arising from the Russian-Ukraine crisis, and high fertilizer costs (due to surging natural gas prices) which in turn feed into crop planting cost. Over the past 3 weeks, most agricultural products staged a rebound with Soybean Meal and Corn getting in on the action as well. The rally resulted in Corn prices up 15% and Soybean Meal prices up 10% from 3 weeks ago while lean hog prices lagged, moving only 4.4%. Thus, we think that lean hog prices have room for more upside. Looking at the chart of HEZ2022, we see the lean hog December 2022 futures breaking out of the range established from the start of the year and coming back to retest the range-high. We see this as support for lean hog prices to break up. Should agricultural commodities continue their rally, higher feed cost would be translated into high lean hog prices. Spread Entry at 90.250, stops at 87.850. Targets at 95. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Reference: www.cmegroup.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios.
Editors' picks
CME:HEZ2022Long
by inspirante
4
Prime time for soybean meal?Similar to our previous idea , we think grains are primed for a move. With soybean meal futures jumping over 10% from last week, some technical set-ups have come into play. Firstly, the September soybean meal contract shows a 7-month head-and-shoulder pattern which failed. A broken right shoulder suggests bullish strength. Secondly, the December soybean meal contract is showing a bull flag that is breaking out, which is also a bullish signal. Combined, we believe soybean meal futures are primed for an upward move with both technical set-ups proving bullish. Entry at 435, stops at 420. Targets at 468 & 490.
CBOT:ZMZ2022Long
by inspirante
Soybean Technical Update (6.8.22)Soybeans (July) Technicals: July soybean futures were able to defend trendline support in the prior two sessions which helped spark a rally in yesterday’s trade. That rally has led to follow-through buying in the overnight/early morning trade with July futures making new contract highs. The market has been up here a few times in the past few weeks but failed to find more buyers. Time will tell if this time is different. With the market at new contract highs, the task of finding the next meaningful resistance point becomes more difficult. Going off the continuous chart you could use the February 24th high for the March contract, 1759 ¼ and the April 22nd high from the May contract, 1757 ½. Finding meaningful points above that is a game of pin the tail on the donkey. Bias: Neutral Previous Session Bias: Neutral Resistance: 1757 ½-1760** Pivot: 1750 Support: 1717-1720***, 1690**, 1673-1679 ½***
CBOT:ZS1!
by OliverSloup_BlueLine
We are getting close to trend changeIt has been a long time since my last Soybean forecast. It is time to pay attention to this market. It is setting up for the decline. Commercials are heavily selling, the seasonal tendency is to the downside, and Insider Accumulation is turning bearish. So, if on Monday we get below Friday’s low, that will be a sell signal. However, it seems like it will take more time to form some pattern. We may see a very short-term rally followed by a sell signal formation. Don’t hurry and wait for confirmation. We have a good setup, but timing matters a lot in this business.
CBOT:ZS1!Short
by UnknownUnicorn1156963
8
Soybean Meal Making A Bearish Flat - Elliott waveHello traders, Soybean meal made a five-wave decline, down from 336.4 level, which is a strong indicator that bears are taking charge in the near-term. We can see a completed five-wave move at the end of May, when price started again recovering, however only for a three legged move. We believe a flat pattern is unfolding within a higher degree wave II now, because legs A and B have three sub-waves, and latest recovery, labelled as leg C is sharp and straight, in impulsive fashion. Ideally, wave C of II will recover towards the Fib. ratio of 50.0 and 61.8 (310/312 level), where resistance will be seen, and a bigger, bearish reversal will resume its path. Trade well, The EW-forecast team
CBOT:ZM1!
by ew-forecast
1
SOYBEAN FUTURES (ZS1!) DailyDates in the future with the greatest probability for a price high or price low. The Djinn Predictive Indicators are simple mathematical equations. Once an equation is given to Siri the algorithm provides the future price swing date. Djinn Indicators work on all charts, for any asset category and in all time frames. Occasionally a Djinn Predictive Indicator will miss its prediction date by one candlestick. If multiple Djinn prediction dates are missed and are plowed through by same color Henikin Ashi candles the asset is being "reset". The "reset" is complete when Henikin Ashi candles are back in sync with Djinn price high or low prediction dates. One way the Djinn Indicator is used to enter and exit trades: For best results trade in the direction of the trend. The Linear Regression channel is used to determine trend direction. The Linear Regression is set at 2 -2 30. When a green Henikin Ashi candle intersects with the linear regression upper deviation line (green line) and both indicators intersect with a Djinn prediction date a sell is triggered. When a red Henikin Ashi candle intersects with the linear regression lower deviation line (red line) and both indicators intersect with a Djinn prediction date a buy is triggered. This trading strategy works on daily, weekly and Monthly Djinn Predictive charts. This is not trading advice. Trade at your own risk.
CBOT:ZS1!
by Dinjin
2
SOYBEAN FUTURES (ZS1!) MonthlyDates in the future with the greatest probability for a price high or price low. The Djinn Predictive Indicators are simple mathematical equations. Once an equation is given to Siri the algorithm provides the future price swing date. Djinn Indicators work on all charts, for any asset category and in all time frames. Occasionally a Djinn Predictive Indicator will miss its prediction date by one candlestick. If multiple Djinn prediction dates are missed and are plowed through by same color Henikin Ashi candles the asset is being "reset". The "reset" is complete when Henikin Ashi candles are back in sync with Djinn price high or low prediction dates. One way the Djinn Indicator is used to enter and exit trades: For best results trade in the direction of the trend. The Linear Regression channel is used to determine trend direction. The Linear Regression is set at 2 -2 30. When a green Henikin Ashi candle intersects with the linear regression upper deviation line (green line) and both indicators intersect with a Djinn prediction date a sell is triggered. When a red Henikin Ashi candle intersects with the linear regression lower deviation line (red line) and both indicators intersect with a Djinn prediction date a buy is triggered. This trading strategy works on daily, weekly and Monthly Djinn Predictive charts. This is not trading advice. Trade at your own risk.
CBOT:ZS1!
by Dinjin
Soybean Meal: Long towards the neckline's Resistance.The price has completed a Head and Shoulders pattern on 1W (RSI = 45.662, MACD = -8.520, Highs/Lows = 0.0000). The neckline is within 293.90 - 341.40, a range that Soybean Meal roughly traded in for 540 days (August 2016 - February 2018). This can be used as a basis for a long term sideways strategy of selling near the Resistance and buying near the Support. ** If you like our free content follow our profile (www.tradingview.com) to get more daily ideas. ** Comments and likes are greatly appreciated.
S
by InvestingScope
2