Are Soybean Prices on the Verge of a Major Breakdown?
Fundamentals
Soybean futures prices have stagnated, holding in a relatively narrow 75-cent range the past few weeks, as conflicting fundamentals have neither bulls nor bears in control. The USDA March crop report was deemed neutral by trader, as a drop in the ending stocks estimate was countered by rising estimates of the South American Soybean crop. The USDA lowered the 2009-10 U.S. Soybean carryout by 20 million bushels to 190 million bushels. The drop in ending stocks was tied to a 20-million bushel rise in the estimate for U.S. Soybean exports to a record 1.42 billion bushels. Globally, however, the Soybean carryout for the 2009-10 season was raised by nearly 1 million metric tons from the February report, as production estimates out of Brazil continue to be raised. The USDA is estimating the Brazilian Soybean crop at 67 million metric tons, up 1 million tons from the month before. If the estimates are accurate, this would be a record for that nation. The Argentinean crop estimate was unchanged at 53 million metric tons. Traders will likely now turn their focus to the USDA's prospective plantings estimate, due to be released on March 31st. There are some private forecasts calling for a slight decline in U.S. Soybean plantings this coming season from the 77.5 million acres planted last year. However, this estimate could change significantly, especially if Corn producers run into planting delays due to a wet spring. The Soybean crop is traditionally planted later than Corn due to its much shorter growing season. Should U.S. growers run into difficulties getting the Corn crop in again this year, it would not be a surprise to see a switch into Soybeans, and the potential for another record U.S. Soybean crop is not out of the question.
Trading Ideas
Soybean futures will soon be hit with harvest reports out of South America and the first estimates for prospective plantings here in the U.S. Given the potential for increased volatility ahead of these major events, some traders may choose to investigate buying strangles in May Soybeans, which would benefit from an increase in volatility and a large price move in either direction. An example of this trade would be buying the May Soybean 900 puts, in addition to buying the May Soybean 970 calls. With May Soybeans trading at 923.75 as of this writing, this strangle could be purchased for about 29 cents, or $1,450 per spread, not including commissions. The premium paid would be the maximum risk on the trade, which will be profitable at expiration in April if May Soybeans are trading above 999.00 or below 871.00.
Technicals
Looking at the daily chart for May Soybeans, we notice the relatively tight trading range Beans have been trading in since the beginning of February. However, taking a longer-term view, there appears to be a double-top formation covering the June and December 2009 highs. This pattern could be a signal that the recent highs just below 1100.00 may signal a major top is in place, and that the longer-term trend will favor lower prices. The 14-day RSI has turned weaker the past couple of trading sessions and currently stands at 38.00. 911.00 looks to be the next significant support point for May Soybeans, with major support found at 887.75. Resistance is seen at the top of the recent range at 985.00.
Mike Zarembski, Senior Commodity Analyst
