Oilseed Optimism
Fundamentals
Soybean futures are lower this morning, erasing Friday's gains on weaker equity prices and a stronger US dollar. The Bean market has made solid gains since early March, in hopes that the global economy will be picking up. Housing data, which can be seen as a leading indicator, has been on the upswing, as has employment data. Last week's ADP, initial claims, and non-farm payrolls reports were much better than anticipated, leading some to believe that the economy may have bottomed out. On the fundamental front, exports of old crop Beans have been extremely strong, which could leave tight supplies of the oilseed before this year's crop harvest begins in late August. As a result, old crop futures have continued to post much larger gains than new crop futures in recent weeks. This trend may persist after the USDA releases its supply and demand report tomorrow, which is expected to show the 2008/2009 crop year carry-over estimate dropping to 130 million bushels, down sharply from the 165 million bushels carry-over estimate in the April report. This is also well below the 2007/2008 carry-over of 205 million bushels. Traders will also get to mull over next week's crop estimate for Argentina, which is expected to show a smaller crop size than previously anticipated, but there is uncertainty as to the size of the downward revision. The H1N1 flu could remain a bearish force for grain prices in the near-term, as feed use could suffer due to China and Russia banning the imports of US pork. Further bans could be seen as negative for feed grains.
Trading Ideas
Given the bullish old crop fundamentals and positive technicals, some traders may wish to consider entering into a bullish option strategy. One such strategy could be a bull call spread, buying the July 1150 call and selling the July 1200 call, for a debit of 18 cents. This trade would risk the initial investment of $900, with the possibility of a profit of 32 cents, or $1,600, if the July Soybean contract was to close above the $12 mark on the June 26th expiration date.
Technicals
The July Soybean chart remains bullish, after breaking through resistance at 1058.50. Prices could come down to test the newly established support at this area in coming sessions on profit-taking. If prices are able to hold these levels, the next area of resistance comes in at 1175. Advances beyond 1175 could be seen as bullish longer term and an indication that prices have bottomed out. Failure to hold advances could be a sign that Bean prices will continue to trade in a sideways channel for the foreseeable future.
Rob Kurzatkowski, Senior Commodity Analyst
