Argentina Gives Beans a Boost
Fundamentals
The grain complex at the CBOT received a lift from extremely heavy rains in Argentina, which could cause crop damage. Grains also received support from a weaker Dollar and higher equity prices. The equity markets have been relentless, seemingly rallying every time investors expect a meaningful correction to surface. This suggests that the dismal demand outlook for Soybeans may not be as bad as many had expected, and the resilience of the economy may stoke the flames of inflation. The rains in Argentina and Brazil could offer the market near-term support. However, the market could remain in a very tight trading range until next week's USDA report. The inclement weather in South America could cause the USDA to trim its forecast for ending stocks, which could further support the market. Traders may also look east for support, as Malaysia may fall short of its palm oil goals and China may increase its imports of Bean Oil. This could cause crushers to begin aggressively buying Beans, with the expectation that demand for crush will improve. Traders may also wish to focus on the price of Crude Oil, which has firmed in recent weeks, but has been quiet in recent trading sessions. Oil is a driver of the commodity markets, in general, and the possibility that biofuel demand could increase if Crude keeps rising has certainly caught the attention of grain traders.
Trading Ideas
Soybean fundamentals have improved with the weather problems in South America and potential increase in Asian demand. Supplies, however, are more than ample at the moment, which could be a stumbling block for future rallies. Likewise, the technical picture for Beans has improved with the snap back from relative lows made a month ago, but prices have been choppy since then, indicating a great deal of uncertainty. Some of this choppiness can be attributed to the fogginess surrounding next week's USDA report. Given the bearish nature of the past two reports and the South American weather issues, some traders may be looking for a bull tilt to the upcoming report. Some traders may wish to put on a conservative bullish position, such as a bull call spread. Traders may possibly wish to consider buying the May Soybean 980 calls (SK0980C) and selling the May 1000 calls (SK01000C) for a debit of 10.00, or $500. The trade risks the initial investment for a potential profit of $500 if the May contract closes above 1000 at expiration.
Technicals
Turning to the chart, we see May Soybeans edging higher in recent sessions, but the market remains trapped in a range between 950-975. Prices have flirted with the 50-day moving average for the past two sessions. A close above the average could be seen as technical progress, as the market has traded below the average for the past two months. A close above resistance at 975 could be a sign that the Beans may be set to test the 1000 level in the near-term. The oscillators are neutral at the moment and give no signal of what may lie ahead.
Rob Kurzatkowski, Senior Commodity Analyst
