Soybeans Near Short Hedge and Rally Target

The soybean rally has been driven by two primary factors – South American production concerns and Chinese demand. Today’s piece will be heavy on the data and light on the dialogue. However, I do want to tie into last week’s article on new Chinese commodity traders and the effects of Chinese governmental policies on free markets as well as the impact of our own crop insurance programs. The sum total of the analysis justifies the tremendous amount of producer selling we’ve seen and makes a strong case for selling soybean production ahead of the coming US seasonal peak.

The most recent Brazilian estimates have dropped expected production by about 2%, to 96.9 million metric tons (MMT). This is about 3% less than last year. However, there is a growing consensus among major analysts and producers that the recent rally has exceeded prices necessary to generate enough production for this year and next. In fact, Rabobank is already pricing year end soybeans at $10.30 per bushel.

cot_banner EQ Curve Tease

 

The real kicker has been the unrelenting Chinese demand, which is expected to reach another record this year. Spot prices for US soybeans at the DaLian Commodity Exchange (DCE) hit their highest prices in two years, rising to 3,380 Renmimbi per metric tonne or, just over $14 per bushel. Meanwhile US beans are trading at $10.75 per bushel. Part of the Chinese premium comes from the shipping costs as you can see on the chart below. However, even after adjusting the accounting from $100 per ton in 2014 on the USDA chart below down to $60 per ton to allow for the decline in fuel prices, still  leaves us with a $1.63 spread between US and Chinese prices for the same physically graded commodity.

American infrastructure provides us with a competitive advantage given our production volume and the distance it carries. Costs in the accompanying text have been adjusted to reflect current fuel prices.
American infrastructure provides us with a competitive advantage given our production volume and the distance it carries.
Costs in the accompanying text have been adjusted to reflect current fuel prices.

The rest of the difference can be explained through two of the Chinese government’s legislative actions. First, the portion of beans sent to China for human consumption must be GMO free and these largely come from America. Secondly, the Chinese government withdrew soybean price floors in the early 1990’s. This forced Chinese producers out of the game, as they couldn’t justify growing a crop subject to 100% risk. Therefore, domestic Chinese production declined substantially even as the country’s agricultural protein demand surged. This is why China is the largest soybean importer in the world.

Chinese governmental legislation supported the growth of rice, corn and wheat over soybeans thus, distorting the true price of soybeans within the Chinese economy.
Chinese governmental legislation supported the growth of rice, corn and wheat over soybeans thus, distorting the true price of soybeans within the Chinese economy.

Now that we’ve setup the background, let’s look at the current situation beginning with the most recent USDA Crop Progress reports.

We've highlighted the areas lagging their historical norms by more than 10%. Note that the difference has been negated by other regions ahead of their historical average for this time of year.
We’ve highlighted the areas lagging their historical norms by more than 10%. Note that the difference has been negated by other regions ahead of their historical average for this time of year.

The planting concerns of the North American crop appear to be more hype than reality based upon the latest USDA numbers. As you can see our total acreage planted relative to spring’s intended acreage report is actually running ahead of schedule. Furthermore, the typical El Nino weather pattern suggests high skies and mild temperatures approaching. This should allow the rapid deployment of this year’s late plantings. Finally, given the recent widening in the corn beans spread at beans 2.7 times corn, we’ll see most of the late acreage available dedicated to beans over corn.

Once again, we've highlighted the laggards and once again, you can see that the total is still ahead of the historical average.
Once again, we’ve highlighted the laggards and once again, you can see that the total is still ahead of the historical average.

Our last point on the expected North American growing season focuses on the transition from El Nino to La Nina. There is a strong correlation between the strength of an El Nino event and its follow up by a La Nina event. Given this year’s record breaking El Nino, it’s no wonder that the expectations of a significant La Nina event this fall continue to increase. If things go as predicted by the North American Oceanic and Atmospheric Administration (NOAA), this fall should be long and mild. These are favorable conditions for finishing a tardily planted or, second crop.

Moving to the soybean charts, we’ll begin with the weekly setups we use in our monthly column for Modern Trader magazine.

The weekly chart clearly shows the divergent outlook on this year's price forecasts between the commercial traders growing the crop versus the speculators betting on the crop's prices.
The weekly chart clearly shows the divergent outlook on this year’s price forecasts between the commercial traders growing the crop versus the speculators betting on the crop’s prices.

Finally, let’s look at the daily chart and see where we think this rally might end for those who haven’t hedged their crops or are looking to take an outright short position in the soybean futures.

We see exhaustion in the near future for this soybean rally as multiple technical factors reinforce the fundamental prices $.50 lower.
We see exhaustion in the near future for this soybean rally as multiple technical factors reinforce the fundamental prices $.50 lower than current prices and $1.00 lower than the anticipated high.

The technical action that has built up over the last couple of weeks is beginning to look like a bull flag formation. This is typical of a market coiling up and storing energy to make another run higher. This type of pattern is measured by adding the width of the channel to the breakout level. This provides a target around $11.25.

We feel the soybean market could reach this area near its seasonal peak, which occurs in June after the North American crop is in the ground. We feel the market’s waning momentum and overwhelmingly bearish commercial trader position will provide resistance too stiff for a merely speculative rally to overcome. As such, we’ll continue looking for outright short selling opportunities as well as suggesting our clients get this year’s bean crop hedged. Lastly, now that we’re above the prevented planting price levels in corn we are likely to see insured corn acres shift to soybeans to take advantage of our own legislative policies as well as the long, mild, La Nina fall.

For more information on our Commitment of Traders forecasting methodology and mechanical programs along with corresponding performance reports, please visit COTSignals.com.


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.