Can Soybean Surge Continue?
Fundamentals
the end of August. This is down from 205 million bushels seen last season, as robust demand, especially from China, has caused U.S. exports to surge. US Soybean exports last week totaled 754,900 metric tons, and Soybean Meal exports were a rather large 338,800 metric tons. Soybean crush figures for April were 134.115 million bushels according to the National Oilseed Processor Association (NOPA). Drought conditions in Argentina and Brazil have drastically cut production estimates for these leading Soybean exporters, which has brought additional business to the U.S. Of course, a slide in the U.S. Dollar the past several weeks has not hurt either. The Soybean rally has definitely caught the attention of large speculative traders, who have been adding to their long positions. The Commitment of Traders report for the week ending May 5th showed large non-commercial traders net long 105,181 contracts, up 19,888 for the week. These large traders also increased their long positions by 10,700 in Soybean Meal and 6,728 contracts in Soybean Oil. In fact, large non-commercial traders are net-long the entire grain complex with the exception of Oats as of May 5th. Bean bears will argue that the entire complex has become overbought and a correction is due, citing very wet condition in the eastern Corn Belt that may force producers to switch production from Corn to Soybeans if dry weather does not materialize soon. Additional acreage for Soybeans would be bearish, especially for new-crop futures starting in the November 2009 contract. In fact, this may already be factored into Soybean prices, as the old-crop July/new-crop November Soybean futures spread continues to widen, with the market already in a steep backwardation (nearby futures prices higher than deferred prices). Soybean Meal futures are also in a backwardation, which only helps further the bullish Bean complex argument. Traders should be aware that Soybean futures and all grain futures can become quite volatile going into the summer months, and wide price swings are not uncommon.
Trading Ideas
Given the potential for heightened volatility in the Soybean complex this year, more conservative traders may wish to explore option strategies in Soybean futures. An example of a bullish trade for old-crop Soybeans would be to buy 1 August Soybean 1100 call and sell 1 August 1300 call. With August Soybeans trading at 1100.00, this spread could be purchased for approximately 57 cents, or $2850 before commissions. The premium paid is the maximum loss on the trade, with a potential profit of $10,000 minus the premium paid if August Soybeans are trading above 1300.00 at expiration in July.
Technicals
Looking at the daily chart for July Soybeans, we notice prices have moved to their highest levels since late September of last year, as tight domestic stocks have caused a run-up in old crop prices to help ration demand. Even though we are at 8-month highs, we are still well below the highs made last July at the height of the commodity bull market. Ironically, Soybean fundamentals are actually, on the surface, more bullish this year than last. Prices are well above both the 20 and 100-day moving averages, and momentum is strong. The 14-day RSI has moved into overbought territory with a current reading of 72.65. Traders should watch the action of the U.S. Dollar, and any rise in the greenback may signal a bout of profit-taking selling by weak bulls which could send July Beans to a test of support near the 975.00 area. The next major resistance point is seen near the 1212.00 area.
Mike Zarembski, Senior Commodity Analyst
