Due to the general increase in volatility over the last few weeks across most of the financial markets, we’re going to shift our focus towards the grain markets as the financials sort themselves out. The grain markets had a weak year in 2015 as global deflation combined with good weather simply made everything cheaper. However, as a direct result of these cheaper prices, we’re now seeing reports of land expected to be left fallow this year as farmers and would be agricultural entrepreneurs shift their focus towards more fertile ground.
We’ve posted the entire 2015 soybean history on the chart below. It was a very dull year in the world of grain trading. Fortunately, the commercial traders were still able to tip us off to several profitable trades throughout the year. However, we think before there are any big moves, the soybean market may need to shake things up, first. Looking at the chart below, notice that most of the fall’s trading took place in roughly a $.50 band. The narrowness of this congestion leaves the market gridlocked as neither the longs nor the shorts are right enough to take profits or, wrong enough to take losses and that brings us to the current situation.
The recent selling by the commercial traders over the last three weeks should be noted for its contrast, as the commercial traders are typically buyers on declines. Their selling, in the face of lower prices, strongly suggests that the market is going to fall through the $8.50 support level it has been building since late summer. We expect this drop to force out some long specs who’ve come in and started buying on this decline. Washing out the weak long interest ahead of the spring planting season could be just what this market needs to get moving again. Otherwise, we’ll continue to bounce along the bottom until a weather event comes to pass which, by the way, is unlikely in a post El Nino summer.
We think the commercial short hedgers, farmers growing the bulk of the world’s supply, are already beginning their forward hedging. They are facing concerns of excellent Brazilian supply, a strong Dollar and waning global luxury tastes. These will all have a significant impact on soybean prices, as Brazilian beans will be relatively cheaper on the global market. This ties into global consumer retrenchment, which will impact the high-end cuts of beef that have been supporting the export market. In fact, we’re already beginning to see this happen in the early planting numbers as beans continue to lose acreage based on production costs relative to finished good prices.
Keep an eye on May soybean futures. If they start trading under $8.50 my guess is we’ll see a flush that is bought heavily at the bottom by the commercial long hedgers attempting to lock in discount prices in their input stream. Furthermore, this will setup the March seasonal low perfectly. This is when we’ll want to wade in.
As always, CotSignals will issue the actual trading signals as they occur. Start your 30-day free trial and familiarize yourself with our methodology ahead of the spring chaos and opportunities.
You may also be interested in, “2015 El Nino and the US Grain Markets.”
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