Meal Mania
Fundamentals
Soybean meal futures continue to push higher, driven by unusually strong Chinese demand. The rising price of Soybean imports has driven up the cost of crushing the oilseed to the point where it is simply not profitable. This has caused Chinese imports of Soybean Meal to surge, as it is cheaper to import the finished product. The fact that the US dollar has pulled back substantially in recent weeks has also contributed to the jump in imports. Export sales for the week were above the median estimate of 115,000 metric tonnes, coming in at 120,020 MT. This week's USDA report did not offer any surprises and reinforced the fact that 2008/2009 ending stocks of old crop Beans are extremely tight. Wednesday's USDA report confirmed traders' suspicions, coming in at the expected 110 million bushel ending stocks figure. Ending stocks are now pegged at 110 million bushels, which would be the lowest carryout since 1977. The tight supply situation has caused some farmers to be reluctant to sell crops. Crush margins in the US, unlike China, are very attractive. This could be a negative force for Meal prices, as we may see more crushing in the US, increasing Bean product supplies. China also has Bean stocks available to process, which could counterbalance farmer stinginess. The exchange rate of the greenback will continue to play a pivotal role in the Soy market. The recent drop in the Dollar's exchange rate has been fairly dramatic, leading some to believe that the greenback may strengthen in the near- term on profit-taking by forex traders. This could adversely affect grain exports in the near future. The longer term outlook remains bearish, suggesting importers could reduce purchases in anticipation of further declines. This does not change the bullish price outlook for old crop Meal, but could pressure prices in the immediate future. Traders may also view the market as somewhat overheated after the sharp run-up, which may trigger profit-taking.
Trading Ideas
The sharp rise in prices may make traders somewhat hesitant to enter the long side of the market at this time. Given the extreme volatility, short-term traders looking for a pullback in prices may possibly choose to enter the options market instead. Traders may look to purchase a July Soymeal 420 put (SMN9420P) for a price of 9.35, or $935. Some traders may decide to exit the contract at a price target of 20.00, or $2,000. The entire purchase amount is risked with this transaction, so some traders may decide to exit the trade if the underlying contract closes above 450 to cut losses.
Technicals
Turning to the continuous Soybean Meal chart, prices may be on the verge of testing all-time highs made last summer. This high would be seen as major resistance, which if broken, puts the market into uncharted territory. Conditions remain overbought, which does not appear to have slowed down advances. The fact that prices have advanced so quickly, with very little pausing, may have some bulls somewhat skittish. This suggests that the market could correct sharply or enter an extended period of consolidation.
Rob Kurzatkowski, Senior Commodity Analyst
