Using Micro Soybean Futures to Finetune Trading StrategiesCBOT: Micro Soybean Futures ( CBOT_MINI:MZS1! )
Shipping industry news recently reported that 30 U.S. soybean ships (about 2 million tons) are currently heading to China, nearly half of which will arrive after April 12th, when China's 10% retaliatory tariffs on U.S. soybeans will take effect.
How big are the tariffs? Let’s say a cargo of soybeans, or 65,000 tons, is sent to China. Assuming the trade is $10 per bushel, given 36.74 bushels per ton, total cargo value is $23.88 million. Upon arriving in China, you owe a new tax bill for $2.39 million!
According to people familiar with the matter, many cargoes are for China Grain Reserves, which may be exempted from tariffs. Soybean cargoes loaded before March 12th are eligible for a one-month grace period. Data from the U.S. Department of Agriculture on March 20th showed that the stock of unsold agricultural products in China was 1.22 million tons. Any sign of order cancellation will help us assess the real impact of tariffs.
In anticipation of the tariffs, China rushes to buy U.S. soybeans in the past two months. In January and February, China bought 9.13 million metric tons of soybeans from the U.S., up 84% year-over-year. I expect the buying will vanish by the second quarter, given new crop arriving from Brazil at much lower prices without the tariffs imposed by China.
China relies heavily on imported soybeans to crush into soybean oil for cooking use and soybean meal, a key ingredient in animal feed.
The oversupply of soybeans pushes the downstream soybean meal market to crash. According to the statistics of China Feed Industry Information, soybean meals spot market prices tumbled more than 600 yuan per ton to 3,180 since February, nearly a 20% drop.
Top feed processing companies, including New Hope, Haida, and Dabeinong, have each announced price cuts ranging from 50 to 300 yuan per ton for their chicken feed and hog feed products.
With lower overall demand, and tariffs making South American soybeans more competitive, U.S. soybeans face a shrinking export market. On my March 17th commentary “Soybeans: Déjà vu all over again”, I expressed a bearish view on CBOT Soybean Futures and discussed the possibility of $8 beans.
Trading with Micro Soybean Futures
On February 24th, CME Group launched a suite of micro-size agricultural futures contracts, including Micro Corn (MZC) futures, Micro Wheat (MZW) futures, Micro Soybean (MZS) futures, Micro Soybean Meal (MZM) futures and Micro Soybean Oil (MZL) futures.
The contract size of the micro soybean futures (MZS) is 500 bushels, or just 1/10 of the benchmark standard soybean futures (ZS). The minimum margin is $200 for the front futures month, and it gets smaller further out. For instance, the margins for May, July, August, September and November are $200, $190, $180, $170, and $165, respectively.
The smaller capital requirement makes it easier for traders to express an opinion ahead of the release of a USDA report or anticipate the impact of tariffs and retaliation.
The latest CFTC Commitments of Traders report shows that, as of March 25th, CBOT soybean futures have total open interest of 853,368 contracts, up 5% in two weeks.
• Managed Money has 89,649 in long, 123,470 in short, and 139,427 in spreading
• Compared to two weeks ago, long positions were down by 12% while shorts were increased by 12%. This shows that the “Small Money” has turned bearish on soybeans
In my opinion, micro soybean futures would be a great instrument to trade market-moving events, particularly the USDA reports. I list the big reports here for your information:
• World Agricultural Supply and Demand Estimates (WASDE), monthly, April 10th
• Prospective Plantings, annually, March 31st
• Grain Stocks, quarterly, March 31st, June 30th, September 30th
• Export Sales, weekly, every Thursday
• Crop Progress, weekly during growing season, April 7th, April 14th, April 21st
• Acreage, annually, June 30th
Hypothetically, a trader expects more soybean planting in this crop year and wants to express a bearish opinion ahead of April 7th Crop Progress. He could enter a short order for May contract MZSK5 at the current market price of 1,023. If he is correct in his view and the contract price drops to 900, the short position would gain $1.23 per bushel (= 1023-900) and the total gain is $615 given the contract size at 500 bushels.
The risk of short futures is the continuous rise in soybean prices. The trader would be wise to set a stoploss at his sell order. For example, a stop loss at $11.00 would set the maximum loss to $385 (= (11.00-10.23) x 500).
To learn more about all Micro Ag futures contracts traded on CME Group platform, you can check out the following site:
www.cmegroup.com
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
