Soybean Bears Start to Shiver as Cold Weather Moves into the Upper Midwest
Fundamentals
Fall weather has rolled into the central U.S. this week, with weather forecasters calling for freezing temperatures in parts of the upper Midwest this coming weekend. Although the coldest temperatures are expected in the Dakotas and Minnesota, there is a chance that the front could spread into parts of Iowa and Illinois. Freezing weather is not what grain producers needed to see, as both the Corn and Soybean crops are behind average maturity levels for this time of year. Although yields would be affected for both Corn and Soybeans if a freeze hits, Soybean crops may fare better, as their development is a bit further along. This has kept any rally attempts for Soybeans in check, as traders anticipate a record or near-record U.S. Soybean crop in spite of potential weather woes and continued weakness in the U.S. Dollar. The USDA will release its October Crop Production report this morning, with traders and analysts looking for Soybean production to be nearly 3.28 billion bushels, which is almost 35 million bushels above last month's estimate. Average yields are expected to be near 43.5 bushel per acre, though this may be optimistic if freezing weather strikes a larger than expected area of the Midwest this weekend. 2009/10 Soybean carry-out totals are also expected to increase by nearly 50 million bushels due to record production. However, it may be financials and not Mother Nature that determine the direction of Soybean futures prices as 2010 approaches, as the falling value of the U.S. Dollar makes U.S. exports more attractive -- especially vs. Brazil, who is a major U.S. competitor in the Soybean export market. The Brazilian Real is near its highest levels of the year vs. the Dollar, and this surge in its currency could definitely hurt Brazilian bean exports, especially to buyers in the Far East. The weak greenback also enhances the appeal of "commodities" as an alternate investment idea, especially for those looking for a hedge against rising inflation.
Trading Ideas
Neither bulls nor bears are dominating the fundamentals in the Soybean market lately, as one has to weigh a potential record Soybean crop vs. increased investor interest in commodities as an inflation hedge. Given these mixed signals, some traders may wish to explore trading strategies that might possibly benefit from a large move in either direction. One such strategy would be the purchase of a strangle in Soybean options. An example of this trade would be buying the January Soybean 1000 call and also an 860 put. With January Soybeans trading at 940.00 as of this writing, the strangle could be purchased for 44 cents, or $2200 per strangle, not including commissions. The premium paid would be the maximum risk on the trade. The trade would be profitable at expiration in December if January Soybeans are trading above 1044.00 or below 816.00.
Technicals
Looking at the daily chart for January Soybeans, we notice prices have moved above the downtrend line formed from the recent highs made on August 13th. This up-move also pushed prices through the 20-day moving average, which is viewed as a bullish signal by short-term momentum traders. Even though the short-term trend has turned up, the longer-term trend remains in control of Soybean bears, with the 100-day moving average still nearly 40 cents higher than current prices. The 14-day RSI has turned up and is now firmly in neutral territory with a current reading of 51.51. Support in January beans is seen at this past Monday's lows of 885.50, with resistance found at the 980.00 area.
Mike Zarembski, Senior Commodity Analyst
