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What is Keeping Soybeans Strong?

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What is Keeping Soybeans Strong?

May 16, 2017

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS ANDMAY NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.

Many traders and analysts are scratching their heads (some down right angry) that soybeans have been able to hold north of $9.50 despite what some would call overwhelmingly bearish fundamentals. The July soybean contract has not managed a new low close since April 4th and on Tuesday even posted the highest close since March 28th. What does this mean and where do soybeans go from here?

On the surface it is difficult to deny the bearish fundamentals for soybeans. South America, Brazil in particular, has just come off a record crop by a significant margin and here in the US we are in the process of planting a record amount of soybean acres. This comes after setting record yields and record production in the US last year.

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Domestic demand has struggled lately as well. NOPA crush (making soybeans into soybean meal and soybean oil) has fallen well short of expectations in recent months suggesting that the USDA may have to once again lower their crush estimate. Exports have been the bright spot, but we are now getting into the time of year where South America takes over as the world’s soybean supplier on the heals of a massive crop. But, will this year be different?

Export sales and shipments, while not as robust as during the peak US bean export months have stayed relatively strong. The South American producer has been slow to sell. A big reason for this could be the recent strength in the Brazilian Real (BRZ)and the weakness in the US$. This is giving a bit of an edge back to the US and we have seen some recent purchases from China at a time when we would expect to loose thisbusiness to South America. Looking at the current price structure for soybeans (keeping the US$ and BZR constant) the US lookstobe competitive in the global soybean market clear out to August.

Another factor contributing to the relative strength in soybeans is who owns them. As of March 1st, US on farm soybean stocks were down 8% year over year (despite a record crop) while off farm stocks were up a whopping 33%. What this means is that when soybeans are strong the producer is not there to step in and sell them in a big way, at least for old crop.

For new crop there could be a significant amount of producer selling, but that selling might not become aggressive until soybeans get above the February average (crop insurance) price of almost $10.20. There will also be a significant amount of South American producer selling at some point but for the moment they seem to be holding tight while the BRZ has gained strength. To some extent the Brazilian producer looks at soybeans as a currency hedge because much of their input costs are priced in US$.

The large speculator (funds) is another reason soybean prices have been resilient. The funds have been reluctant to build a large short position in soybean both now and historically. Soybeans have beena darling of the speculative community as a store of value and inflation hedge since at least the mid 2000’s. Unless the funds change their strategy the lack of selling from the large speculator, the US producer and the South American farmer are allowing soybeans to hold prices that many think are too high compared to the fundamentals.

In the long run there could certainly be more downside potential for soybeans. With record planted acreage (which may be growing with planting delays in corn), it is possible that we have a new record production by a long shot if weather is very good and the national average yield is in the 50s again. Even with a trend-line national average yield of 48 bushels per acre some would argue that we will have ending stocks well over 500 million bushels. But, we have to grow it first, and growing seasons create uncertainty. Uncertainty about production generally translates into higher prices as producers are reluctant to sell too much of what they don’t have yet and end users (global and domestic) can get nervous about weather issues hurting production.

We will see where new crop soybeans end the marketing year, but for the moment the bearish traders might have to wait till we have a better idea of what crop we have. For old crop soybeans it is hard to push a market down if a big buyer, in this case (most cases) China is stepping in and buying dips. Keep an eye on the US$ vs the BRZ as this might have a big hand in how US exports end up for the remainder of the marketing year.

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Give us a call if you would like more info on the strategies we are using or if you would like to set up an account to put a plan in action. Ted Seifried – (312) 277-0113. Also, feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit.Follow me on twitter @thetedspread if you like.

JulyCorn Daily chart:

JulySoybeans Daily chart:

JulyWheat Dailychart:

Producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!

Ted Seifried (312) 277-0113 or tseifried@zaner.com

Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie

Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.

FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION’S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE’S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION.

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