Tag Archives: beans

Soybean Reversal on Technical Target and Commercial Selling

Soybean farmers are now the most short they’ve been since October of 2012. This means that U.S. farmers who are able to take advantage of South American misfortune stand to have their best year in quite awhile. There’s no question that South American production is not going to pass muster. However, in an interesting twist of fate, the same weather that kept us out of the fields this spring is going to be a boon to late planted soybeans heading into a La Nina fall growing season. Therefore, we view this last leg up in the soybean market as a selling opportunity rather than the emergence of a new trend.

Continue reading Soybean Reversal on Technical Target and Commercial Selling

Historical Wheat vs Corn Spread Prices

Trading the grain markets has always been tricky, especially during the planting and harvesting periods. Historically, this has placed us at the agricultural epicenter for global grain trade. Obviously, tension in Ukraine and the corresponding 15% spike in wheat prices have reminded everyone that even the agricultural markets are now a global game. In this respect, it’s no longer enough to keep an eye on domestic weather patterns to determine the success of our winter crops or anticipate spring wheat seeding. Now, it is imperative to focus on global production issues and World Trade Organization (WTO) agreements, as well.

Continue reading Historical Wheat vs Corn Spread Prices

The Bean to Corn Ratio Spread

The recent weeks of hot weather have begun to take their toll on the crops in the field. Primarily, we are witnessing soybean’s greater sensitivity to late summer heat relative to corn. Not surprisingly, soybeans have rallied about 14% since August 8th as compared to less than 3% for corn. The result of this divergent behavior among crops grown side-by-side is that the bean to corn ratio has been elevated to levels that we don’t view as sustainable. Therefore, we’ll look at some reference points for the bean to corn ratio as well as the relationship between these two crops before ending with some fundamental data that forces us to re-think the usefulness of historical data in the face of a fundamentally changing marketplace.

The bean to corn ratio is simply the price of soybeans divided by the price of corn. Currently, November soybean futures are trading around $13.55 per bushel and December corn futures are trading at $4.68 per bushel. The November and December futures contracts represent this year’s crop in the fields, respectively. Therefore, the current bean to corn ratio is approximately 2.9. Beans are 2.9 times more expensive than corn on a per bushel basis. The last time this spread was this high was August of 2009. There have only been four years since 1975 when ending prices for the current year’s crop have closed at a spread greater than 3. According to Carl Zulauf of Ohio State’s Department of Agriculture, the maximum traded price for the ratio is 4.1 in May of 1977. He’s also published the low figure of 1.72 in July of 1996. The average for the spread over the last 45 years is 2.52 while the spread’s normal trading range is 2.19 – 2.85.

Soybeans and corn obviously share many of the same concerns throughout the year and therefore their prices tend to move in the same general directions. Their seasonal characteristics are very highly correlated with the lone notable difference being soybeans’ tendency to remain at higher prices later into the spring due to their later planting dates and associated concerns. Once beans get past July 4th, they sell off just like corn until harvest time nears at which point they both get another boost. The correlation between beans and corn has been positive on a weekly basis all the way back to November of 2012. The daily chart, on the other hand is currently displaying the first negative correlation between these two markets since early May of this year which coincides with typical planting issues.

The United States is still the dominant market maker in both corn and soybeans. However, the rapid expansion of Argentina and Brazil’s commercial farming industry is changing the dynamic of the global corn and soybean markets. This year, the combined output of Argentina and Brazil is likely to be nearly 30% of global corn production and as much as 60% of global soybean production. The combined soybean output of Argentina and Brazil is expected to outpace the US by a third. This must change the way we view the data at hand. This is especially true when studies are produced using 45 years worth of data as the Ohio State piece referenced. The global supply of beans and corn hasn’t been split among our countries. The process has been and will continue to be, additive. Total global production will continue to increase overall with foreign production continuing to grow faster than domestic production.

The marketplace always reflects the participants’ best guess of fair value at the last traded price. Therefore, both domestic and global production rates are considered when trades are placed at the US commodity exchanges. However, more weight is always given to prices in the larger context. Daily highs and lows matter more than those of the last minute just as weekly highs and lows are accorded greater importance than their daily counterparts. Therefore, when markets make multi week, monthly or yearly highs or lows, we pay attention. The soybean rally brings us to levels not seen since last December and has pushed the relationship between corn and soybeans to multi-year highs.

We believe that the latest push in this spread has come from speculative buying in the soybean market. There are three primary drivers of mass speculative action in the commodity markets, all of which lead to whipsaw action at extreme price levels. Tension in the Middle East spurs speculative energy buying. Stock market collapses spur knee jerk selling. Finally, droughts spur speculative corn and bean buying. All three of these situations end up with small speculators left holding the hot potato. The current Commitment of Traders report clearly shows large amounts of small speculative buying heading into the USDA Supply/Demand and Crop Production reports. Considering commercial traders have pared their net position by 25% over the last three weeks, we believe it’s likely that this report could mark the high for the bean corn spread as it returns to its normal trading range.

Buy Beans Below the Teens

The growing season for U.S. crops is right around the corner and several factors, fundamentally, technically and seasonally are lining up to suggest that the time to buy soybean futures and soybean meal futures may be right around the corner. Last year’s drought placed heavy demands on Brazilian and Argentine crops as well as the beans left over in the bins. The tight supplies have left us with a stock to usage ratio of less than 5%. In fact, the USDA recently stated that this year’s U.S. stock to usage ratio of 4.3% is the lowest since 1965. Typically any ratio below 10% is bullish for U.S. beans.  Meanwhile, the global stock to usage ratio is the lowest since 1996.

Demand for soybeans also continues to increase. Chinese hog farming represents a large portion of the soybean demand through their use of soybean meal as feed. The USDA expects that China’s hog production may reach more than 60% of the world’s total in 2013. In fact, Chinese soybean imports have increased six-fold since 2000 to meet the growing demands of their own domestic usage. U.S. exports are already 25% above last year’s levels and currently stand at 93% of the USDA’s export expectations of the U.S. crop in 2013 for the marketing year ending this August. China’s imports have led the way and are up 13% year over year.

Seasonally, soybeans tend to sell off and make an early spring low sometime in February. This is followed immediately by a rally into Memorial Day as planting related weather concerns force the market back and forth between, “too dry” or “too wet.” The late February low also coincides with the South American harvest, which is currently in full swing. The South American harvest sell off is similar to the September harvest sell off we get here in the U.S.

The final piece of seasonal analysis is the analysis of the seasons themselves. Last year’s drought has not been sufficiently squelched by winter snows. Soil moisture in the leading soybean producing states is running dangerously low. Nine of the most productive states are sitting at 20% of normal soil moisture. This is the mirror image of last spring when only 20% of the same area was below normal moisture levels. The world cannot afford a drought in the U.S. in 2013.

Moving to the more technical nature of the market the commercial traders have been net buyers of beans since November. Their net position has doubled and they’ve only been net sellers twice in the last 15 weeks. Commercial traders have been early buyers in each of the last three years. Each of the last three years has given us an early rally, as well. Deeper research reveals the importance of this. Commercial traders have come into the year on a positive note one third of the time over the last 30 years. Soybeans have had meaningful early rallies in seven out of the ten years that commercial traders have started the year on a bullish note.

The USDA has raised its 2013 forecast to a range of $13.55 – $15.05 per bushel. These estimates are based on the November soybean futures, which will be this year’s planted crop. November soybeans are currently trading at $12.70 per bushel. The November beans have formed a triple bottom on the daily chart near $12.55. This would imply the market wants to trade lower and see what happens under the $12.50 area. Technically a test or, penetration of $12 would provide an ideal bottom to start looking at the buy side for the November soybean futures contract. Breaking the $12.50 level would accomplish two things. First, it would flush early and weak buyers out of the market and allow the positions to reset themselves. Secondly, it would create an oversold condition that, combined with positive commercial trader momentum could be used as a springboard to get long on the bounce higher.

There are far too many bullish global factors to ignore the buy side of soybeans in 2013. The fundamental factors of growing global demand in the face of record low current inventories will magnify any weather related issues. The soybean market typically overshoots its targets and suggested price ranges. Therefore, buying soybeans $1.50 below the bottom of the USDA’s price targets may very well net a profit in excess of the USDA’s high side of their forecast at $15.05.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Beaten Bean Bulls

The month of May has not been kind to the soybean market. In fact, I’d say it’s bearing the brunt of a perfect storm of bad news. Old crop, July soybeans are down more than 10% for the month while this year’s crop is fairing only slightly better. This beat down has come from all angles, including weather, speculative traders and the global economy. However, once the dust settles, this may prove to be the best buy of the summer.

The U.S. agricultural markets are all well ahead of schedule thanks to the exceptionally warm spring. The most recent crop reports show that soybeans are 76% planted. This record high is 34% above the five-year average for this time of year and 31% ahead of last year’s pace. These figures account for the 95% of U.S. acreage. This amazing crop progress has taken the starch out of the spring planting fear premium we normally see.

The crop progress reports signaled a cautionary note to the upward trend that began in earnest this past February. The early rally was fueled by the tightening global supply and exports to China far ahead of schedule. Small speculators and managed funds jumped on this rally in record numbers. I posted the overbought nature of the bean market when they set their first long position record in the March 20th Commitment of Traders report at 385,619 contracts. This compares to a net position of just 18,082 at the end of January. I think it’s safe to assume that last week’s record position of 480,586 will set the high water mark as many of these traders have been forced out of the market during the course of its 10% decline.

The final straw that’s broken the soybean bull market’s back has been the increasing concerns of a fractious European Union and its effect on the U.S. Dollar as a safe haven currency. The month of May has seen currency fly out of the European Union pushing the Euro to its lowest levels since September of 2010. Considering that the European Union is now China’s largest trading partner, it’s no wonder that China’s economy has also shown unexpected weakness. The last link is that China is our number one soybean export market. Therefore, it is expected that China’s purchases may slow, as U.S. beans become more expensive on the global market.

Now that we’ve identified the causes of the decline, let’s focus on where the bean market is headed. The early plantings were no free lunch. The early spring and the continuation of the same weather patterns are now raising concerns. The lack of rain is causing a crust to form in the fields and hinder the germination process. Furthermore, farmers who intended on growing early wheat and late soybeans (double cropping), need more moisture in the soil to get their late beans in the ground. Estimates vary as to how much double crop beans will add to total U.S. output but there is certainty that the weather is the key for next couple of weeks.

Finally, now that the froth is off the top we can return our focus to the supply and demand factors that called so many speculative dollars to the market in the first place. Soybeans and more specifically, high protein soybean meal are near record low supply levels. The decline in South American production has amplified the emphasis on this summer’s U.S. crop. Bellies must be filled regardless of the economic uncertainties. Global demand for food will be the last of the cutbacks made. Therefore, this decline is fortuitous for patient traders. There is strong technical support for this year’s crop near current prices of $12.50 per bushel. There is the possibility that a complete, “risk off” event could push the market to $12.25 or lower. Either way, the supply and demand numbers certainly suggest a test of the all time highs above $16 per bushel is well within the realm of reality.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Crude Oil vs. Natural Gas Ratio Spread

This week’s trade has been all about the spread between natural gas and crude oil. Using inter-market analysis allows us to compare the value of substitute goods. In this case, we can compare the price of crude oil to the price of natural gas to determine what price levels it becomes cost efficient for the markets’ participants to shift their energy needs from crude oil to natural gas and vice versa. The key to this type of analysis is using the proper pricing methodology. The calculation of the crude oil vs. natural gas spread is done using a ratio spread. Dividing the price of natural gas, currently around $4 per million metric BTU’s into the price of a barrel of crude oil at $77 gives us a ratio of 19.25. This ratio peaked at an all time high of 22.7 in April of this year.  A spread ratio closer to 12 would represent an average relationship over the last few years.

 

The trick to trading this ratio is to try and create equal dollar movement in both contracts. We want the trade’s profit or loss to be accurately reflected by the ratio’s movement. If we were to simply do a one to one spread, buying natural gas and selling crude oil, we would end up with an imbalance on the side of the trade that has the largest daily dollar movement.

 

This problem is solved by using the average daily range multiplied by the market’s point value to provide us with the average daily dollar fluctuation of the individual markets. Crude oil’s nine day average range is exactly $2 per barrel. There are two sizes of crude oil contracts, the full size and the half size. The full size is $1 per point, which means an average daily range of $2,000. The half size obviously yields an average daily cash fluctuation of $1,000. The natural gas market has an nine day average range of .1563. This market also has two contract sizes. The full size contract which, has a daily cash fluctuation of $1,563 and a quarter size mini contract which, fluctuates about $390 per day.

 

Now, we have the pieces to construct a trade that is dollar value neutral and will accurately reflect our natural gas to crude oil ratio spread. Ideally, we would sell one full size crude oil contract with a daily fluctuation of $2,000 and buy one full size natural gas contract with a fluctuation of $1,563 plus an additional purchase of one mini natural gas with a daily fluctuation of $390. This gives us an average of $2,000 daily movement in the crude oil and $1,953 daily fluctuation in the natural gas.

More information on crude oil and natural gas can be found at NY Energy Futures.com

 

This type of ratio spread can also be used in grain markets when trying to spread corn or wheat against beans or even the corn to cattle spread. Please call with any questions regarding this trade or, spread trading in general.

 

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

Major Turning Point

This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.

Today’s price action appears to have trumped the
deflation/reflation argument that has been building over the last month. Many
of the markets have been rallying on small speculative buying as seen in the portfolio
rebalancing by the major long only funds.

Looking at the Commitment of Traders reports over the last
few weeks, we can see an increase in the net long positions of small
speculators in the following markets:

Swiss Franc, Japanese Yen, Canadian Dollar, Unleaded Gas,
Wheat, Beans, Bean Oil and Meal, Corn, 10yr. Notes, Eurodollars, Live Cattle,
Hogs, Copper, Orange Juice, Coffee, Sugar and Dow Jones futures.

The commercial hedgers have gladly stepped in to take the
short side of these trades with their numbers building as we’ve neared the
October – November resistance in many of these markets. Obviously, the interest
rate sector is the exception, although, there is strong short hedging taking
place at these levels.

There are a few major reasons for the resistance at these
levels. First, the U.S. Dollar Index has a strong bias towards setting a high
or low for the coming year in the first two weeks of January. If the Dollar’s
trend is going to be higher, the global demand for American commodities will
decline. Secondly, portfolio rebalancing by the major index funds for 2009 is
going to balance smaller gold weighting against heavier crude oil weighting.
Today’s collapse in crude oil futures is an indication that they may have filled their
need for crude. This also helps explain Gold’s inability to rally through $900
even on weak U.S. Dollar days. Lastly, the economic numbers continue to get
worse with each release. Last week’s ISM numbers were the worst since 1980.
Unemployment this Friday should continue to rise and eventually head north of
8%.

This is a very brief outline of the weakness I’m expecting
in many markets in the near term. Please call with any questions.