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 Chinese government repeatedly attempts to micro-manage the lives of its citizens. The effects of which continue to be unintended consequences both socially and economically. This week, we’ll discuss the citizens’ pool of money that the government continues to hold hostage and the mechanisms the Chinese government has employed thus far that have created a predictable ripple effect, visible to everyone but their own government. Somehow, they seem to be continually surprised by the unintended consequences of their own actions. We’ve watched Chinese investors’ money run from property to the stock market and now, to commodities. We’ll look at some of the massive scale of fairly predictable rookie trader outcomes that have been their unintended consequences.
This year began with a bang. Our forecasting models accurately predicted many of 2016’s early commodity rallies in metals, energies and grains. Our models also expressed the notion that while these rallies would be sharp, there was little evidence to suggest that this was anything more than a temporary spike in a deflating global economy. Therefore, the persistence of these rallies has been the biggest surprise of the year. However, the same factors that have led us to believe that these rallies would be temporary have only increased their alarm. This week, we’ll examine the primary component of our deflationary argument while also shedding some light on an inspired tweak to an existing measure of global economic activity.
The farming industry in the United States has been under considerable pressure as the gains of years’ past were quickly washed away by modern technology and agronomy practices. The record prices achieved in soybeans just last year now seem like a lifetime ago to farmers who bought land and equipment based on the increasing average prices of corn, soybeans and wheat over the last decade. Today, we’ll take a long-term look at the soybean market and see what has farmers so anxious to sell.
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.
The corn market doesn’t get a lot of hype in the news except during years of extremes. It’s a shame really, because the corn futures market is one of the world’s biggest and is dominated by the hedging activity of domestic farmers and producers battling it out over the smallest edge of profits at the margin. Following the battle between these domestic behemoths is a wonderfully anticipatory data stream for successfully trading a market that’s small enough to be accessible to the retail trader but large enough to capture the world’s attention and usage. Here is how we employ the Commitment of Traders report in conjunction with technical and seasonal analysis to stack the odds in our favor.
We often state that commercial traders are value players. They take action in the futures markets when there’s alpha to be gained over and above their local cash offerings. The only real difference is whether we’re discussing wheat growers hedging their forward production or, whether discussing the long hedging end users in the wheat market. Both of these participants are responsible for meaningful price discovery in the futures markets through their actions. However, their actions and their corresponding effects on the underlying market couldn’t be more different quantitatively or, qualitatively. We’ll examine the current situation and setup in the chart below.
Global protein demand has been one of the primary drivers of grain prices as meat consumption over the last 15 years has increased by more than 13% in the same period. Soybean meal is a primary ingredient in protein production, primarily as feed but also as a meat substitute for people. As a result of this demand, soybean meal prices have gotten out of whack compared to its brother, soybean oil. This week will be a chart intensive study on the impact a slowing global economy will have on soybean meal’s multi-year trend. Finally, we’ll address some of the issues associated with trading the soybean crush spread or simply, the bean meal versus bean oil spread.
As most of you know, we focus on swing trading opportunities both for our own accounts as well as the money we manage. We do this for several reasons and we’ll include a short-term setup at the conclusion of this piece. However, today’s main focus will be on using Commitment of Traders analysis within an existing trend to determine an entry point and time in the current soybean meal market. The lesson, however, works across all commodity markets for which Commitment of Traders data is reported.