Michael: Hello everyone. This is Michael Gross of OptionSellers.com here with head trader James Cordier here for your April Option Sellers Video Podcast. Well, James, we didn’t see any abatement in the volatility in the stock market this month. In fact, Fed chairman Jerome Powell last week coming out, maybe spooking investors, talking about asset prices and maybe even financial markets being overvalued here… a little ghost of 2007. What do you think is going on here?

James: Michael, it’s interesting... for the first time since quantitative easing was first announced practically a decade ago, investors and money managers now actually will have an option of not just pouring money into long stocks but fixed income is going to now be some of the talk. The tenure is approaching 3%. With what Jerome Powell said this past week, we will be reaching 3%, possibly 3.25 and 3.5 coming up over the next 6-12 months. With that in place, does the stock market have now still a free ride to the upside? Investors are going to be putting some of their money into fixed income and for the first time in practically a decade there’s an alternative from just being long the stock market.

Michael: Obviously at this point, a lot of investors, especially high net-worth investors, are always looking to diversify into alternative asset classes. Physical commodities as hard assets always seem to have an appeal in any type of environment really but especially in this type where you have a lot of the jitters about paper assets.

James: There’s probably more jitters now than I can think of over the last decade. As you know, we have investors contacting us on a daily basis, I think, just for that reason. Investors wanting to diversify right now from the stock market, I think, is hitting a really great stride right now. Wanting to get into markets that are uncorrelated to what the DOW does and what the S&P does is not only really popular right now but a lot of the real investors, you know, the people with millions of dollars under management, they are looking for alternatives now and I think they’re going to find some, not only in yield bearing accounts like fixed income but certainly in commodities like what we do, as well.

Michael: Of course, we are in springtime now in the commodities markets. That means there’s a lot of things that happen in a lot of the physical commodities in the springtime, especially the agriculture markets and energy markets. We have some great seasonal tendencies, as well, in the spring.

James: We do. Needless to say, a lot of people look at commodities and they think about the weather. Over the next 90 days the weather will be a really big factor. Quite often, end users for soybeans, corn, and wheat, they need to get insurance and make sure that they’re going to have these products for what they do and basically for animal feed. Of course in the United States, the largest producer of corn and soybeans, the weather is key. Often, they build in a certain premium during the months of May, June, and July just in case the farmers in the United States don’t do exactly what they would have hoped each year. Of course, later on in the year, once again the U.S. farmers are the best in the world and the spring rallies that often happen normally are just great sales for doing what we do.

Michael: Speaking of those rallies or markets, we have a couple we’re going to feature this month that are maybe a little ahead of themselves. Now we have some of that inflated call premium. If you are one of those investors, it’s just learning how to sell options or learning how to sell options on commodities, these are two markets we think are really going to help you... Good opportunities, actually markets we are taking advantage of now in our management portfolios. We are going to cover those for you here in just a minute. Thank you.

Michael: Okay everyone, we are back with our Market Segment for this month’s podcast. The first market we’re going to discuss this month is the soybean market. Soybeans have been in a strong rally the past couple of months primarily as a result of some things going on down in South America. James, do you want to talk a little bit about that and what’s driving prices right now?

James: Michael, corn, soybeans, and wheat are all about the weather. The third largest producer in the world is Argentina. They’ve had a very dry growing season this year. For that reason, they do have reduced yields and we’re going to have a little bit of tightness out of that South American country. They are the third largest producer in the world and basically the U.S. weather is normally the big catalyst for the market moving up or down. This year, Argentina, which of course they have the opposite season here in the United States, their summers/our winter of course, and while there’s not much to talk about in the United States, traders look elsewhere. In South America, especially in Argentina, they had a really dry season. For that reason, the soybean prices have been bumping up to nearly 12-month highs over the last couple weeks.

Michael: Yeah, we have seen some reduced yield expectations right now. We were at 60 million metric tons out of Argentina just a couple of years ago, now we are hearing it might be down as low as 40 million… it’s not reflected yet here. I guess that has been driving prices substantially higher, but we’re nearing the end of that growing season there now, aren’t we?

James: We really are. Quite often, traders and investors will price on the worst-case scenario, so then once the corn and soybeans are actually harvested, often the weather wasn’t as bad as people thought and then the market readjusts to the current level of the production it actually turns out to be.

Michael: So what you’re saying is although we’ve had some problems out of Argentina, they do about 50% of the production done in the U.S. or Brazil. From what I’m hearing, they’re thinking that production out of Brazil may make up some of those losses out of Argentina already. Is that correct?

James: Unlike Argentina, just to the south of Brazil, Brazil has had just wonderful growing conditions for cocoa, coffee, soybeans, orange juice, sugar. Brazil is just a wonderful garden right now for growing soybeans. I think the Brazilian harvest will be larger than expected and that will make up probably a quarter and a half of what we’re going to be losing out of Argentina this year.

Michael: Of course, as South American harvest is under way, we get started with planting here in the United States. The market probably starts focusing on what’s going on with the U.S. crop here pretty soon. If they do, the United States has some pretty big supplies heading into the planting season this year.

James: We’re certainly going to have harvest pressure probably starting September-October of this year, and the Argentinean drought it probably going to be a forgone memory at that point. Supplies are going to be more than plentiful in the United States, and of course the U.S. is going to be the supplier to the world because of our ending stocks here in the United States, which is something I know we want to talk about as well.

Michael: Starting off the year, we have the second highest ending stocks in the last 30 years and the highest in over a decade, so we’re already starting off the year with big supply. Now, the planting intentions, which we’ll know more for sure the 29th of March when that report comes out, but right now estimates are we’re going to have at least as many acres planted as last year, 90 million with estimates now at 90-92 million, so if we even have average yields we could be looking at all-time record ending stocks for next year. Like you said, that harvest pressure coming in… if they’re harvesting that size of a crop you’ll get some pretty substantial harvest pressure. So, the trade you’re recommending here right now, you’re thinking that this rally is probably going to fizzle and we’re going to see steadier lower prices. What are you looking at to trade here?

James: Michael, we think that come October-November, soybean prices will probably be below $10 a bushel. We’re trading around $10.40-$10.50 right now. Basically, on the dry conditions in Argentina, we’re thinking that soybeans have a little bit of a chance to rally another 20-30 cents. They could get to the mid-upper dollar region. We love the idea of selling soybeans at the $13 level, so we’re going to be recommending soybean calls at $13 and $13.25 thinking that while soybeans might have a big of a rally going into May and June, we love the idea of being short in fall. So kind of like football, we’re not exactly throwing the ball to where we think the market is right now, but we’re selling options to where we think the runner’s going to be, and the runner being a huge harvest in the United States come September and October. $13 level for soybeans, you’ve got to bet on something, and boy we don’t see that happening nowhere being near that price.

Michael: Yeah, that’s a pretty big cushion there to be wrong. The USDA itself has average on-farm price this year at $9.25, which is down here. So, that seems like a pretty safe bet. Let’s go ahead and move on to our next market right now, and that would be the cocoa market.

Michael: James, cocoa is another one of these markets that has had a pretty good run here over the last several weeks. What’s going on here with prices?

James: You know, similar to soybeans that we just talked about, one of the main producers of cocoa is the Ivory Coast. They are the largest producer in the world. They’ve had dry conditions this past year and, while those dry conditions certainly will reduce some of the pods yielding this year, we have what’s estimated to be 2% less cocoa being produced worldwide in 2018; however, a 2% drop in producti