Food Inflation Puts Soybeans on Center Stage for Put Sellers

James Cordier submits:Food inflation has taken center stage in recent weeks, as prices of everything from corn to coffee have been on a bull market tear as of late. As we have discussed at length in our weekly and Monthly Newsletters for several months now, the global economic set up continues to favor a "running of the bulls." [James Cordier discusses Selling Options to take advantage of Food Inflation, CNBC's Power Lunch, January 24, 2011.] US economic recovery, continued Chinese and BRIC nation expansion, and a still sluggish US dollar have led to a voracious rebound in demand for foodstuffs. Nowhere has this demand surge been more evident than in the soybean market. As developing economies see their citizens becoming more affluent (relatively), the first thing populations tend to improve are their diets. For many, this means increased meat consumption. As much meat is produced domestically in these nations, it builds a growing demand for not only grains for human consumption, but for animal feed. And a primary ingredient for animal feed is soybean meal.Growing populations with a rising standard of living in BRIC nations has spurred a surge in demand for crops such as soybeans.As the world's second largest producer of soybeans (behind Brazil), the US has seen an ever larger percentage of its total production being exported to meet this demand. US Ending stocks and stocks to usage ratios have remained near historical lows for three straight years as producers struggle to meet ever growing global demand. As 2011 begins, US stocks remain near historical lows. Yet US supply will have to meet the lion's share of global demand until the first South American soybeans become available in late March. At the same time, over the next 60 days or so, soybeans will be competing for acreage with corn, wheat, oats and cotton for planted acreage in 2011. Ironically, in the Spring, the commodities that end up with the least acreage see reduced supply estimates for the fall. This often results in higher prices for these commodities. Many traders now believe that soybean prices are 'undervalued" as compared to corn, and that some price "catch up" is in order to secure enough soybean plantings this spring to avoid shortages in the fall. If you are a corn or soybean farmer in 2011, it's all good.We feel the low US stocks and relentless world demand story will continue to support prices for soybeans in the first half of 2011. Harvest pressure from Brazil could curtail prices somewhat in Q2, but "planting season" in the US at the same time tends to create enough anxiety to create a counterweight, if history is any measure (past performance is not indicative of future results.)It is our opinion that the odds of a price washout (steep correction) in soybeans is minimal given the anxiety over supplies, and that a put selling strategy appears to be a preferable approach to the market at this time. Volatility is good and investors should look to sell deep out of the money puts and not be afraid to go out to July, August or even September contracts. Even a moderate price increase should make these options close to worthless before the crop is finished being planted this May.We will be working closely with our managed clients this month in collecting soybean premiums for their accounts. Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.Additional disclosure: clients are positioned in soybeans options or may be in the near future.Complete Story »