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.
We wrote in detail about the massive amount of commercial trader selling ahead of the August 12th grain reports in, “COT Report Shows Major Selling Ahead of USDA Reports,” published right here at Equities.com. Corn is off by 5%, wheat is off by nearly 7% and soybeans are off nearly 9% since then. For this morning’s commentary, we’ll look at soybean meal which has sold off around 7.5% since the August 12th World Supply and Demand report.
We focused on two main themes this week. First, we looked at selling the Euro currency for TraderPlanet and followed it right up with a look at the Dollar Index on Tuesday for Equities.com. Meanwhile, our main piece focused on the grain markets ahead of Tuesday’s USDA Acreage Report.
The USDA releases its planted acreage estimates on Tuesday, June 30th. This report typically sets the tone for the coming marketing year. David Hightower’s analysis has been posted to our site and we defer to him in terms of the fundamental supply and demand numbers. We’ll pick the individual markets apart through the actions of the commercial traders, the actual producers or end line users of these grain markets. Given the depressed levels many of the grain markets have been experiencing can this report actually do further damage?
The soybean meal futures have been sliding sideways to lower for the last seven months. Historically, this makes all the sense in the world as the harvests are in and supply and demand become the driving factors of price rather than weather and growing concerns. The shift towards planting and summer markets changes the equation and brings us to where we currently stand. July soybean meal has finally executed the test of its support and finds itself strengthening heading into its strongest seasonal period.
This week’s primary analysis focused on, “The Interest Rate Conundrum.” Since this is a macro piece, I thought I’d review the last bits of trading in more detail. The trades over the last two weeks are a great look into the real world of discretionary trading. We’ve had a loser that bounced back as quickly as it knocked us out (sugar), a non-event of a trade (bean meal), a nice winner (silver) and another fish on the hook (hogs). If we can land the last one, it’s a decent week trading….warts and all.
The grain markets may finally be perking up in spite of declining energy costs and record harvests. We’ve previously mentioned the oat futures as the first of the grain markets to budge in, “Combining Buy Signals in the Oat Futures.” Today, we’re looking at soybean meal and the set of indicators we use to drown out the voices of hyperbole both in print and on TV. Quantitatively speaking, the soybean meal futures have triggered a COT Buy Signal. More importantly, you can see the consistency and magnitude of these plays on the chart below.