Too Much of a Good Thing?
Fundamentals
"Rain makes grain" is the old adage of grain traders who know that ample moisture during the growing season usually assures a bumper crop come fall. This year has been no exception, as US summer cash crops are off to a good start. The most recent crop progress report released on Monday afternoon shows the US Soybean crop is rated 73% good to excellent as of this past Sunday. However, some traders fear that the heavy rains that have occurred throughout the Midwest and Great Plains growing regions during the past few weeks could begin to hamper the emerging crop. Some Soybean fields may need to be replanted due to heavy rainfall causing them to be flooded out. In addition, the recent rains have delayed the winter wheat harvest in some areas, which could delay or even eliminate some of this acreage from being double-planted into Soybeans this year. Excessive rainfall has really hampered grain producers in western Canada, where an excess of rainfall is expected to lower the acreage dedicated to canola production this year. Lower Canadian canola production could give a boost to Soybean prices if buyers are forced to switch their purchases from canola oil to Soybean oil. Many Soybean traders will also turn their focus to the east, as less than stellar weather conditions in China could force the world's most populous nation to become an aggressive buyer of US grains this season if production levels disappoint. This upcoming season could provide interesting trading opportunities in Soybeans, as the potential for a record US harvest as well as a potentially disappointing crop are still possible as we move further into the heart of the summer, when weather forecasters become very popular figures in the Midwest.
Trading Ideas
As the calendar turns and we enter the official start of summer in the northern hemisphere, many experienced traders prepare for an increase in price volatility in the grain markets. Those traders looking for a potentially large move in Soybean prices who are unsure as to the direction of the price move could explore the purchase of a strangle in Soybean futures options. An example of this trade would be buying the August Soybean 970 calls as well as buying the August Soybean 900 puts. With August Beans trading at 942.75 as of this writing, this strangle could be purchased for about 35 cents, or $1,750, not including commissions. The premium paid would be the maximum risk on the trade, and the trade will be profitable at expiration in July should August Soybeans be trading above 1005.00 or below 865.00.
Technicals
Looking at the daily chart for new-crop November Soybeans, we notice after reaching 8-month lows last week prices rallied over 40 cents, moving above the 20-day moving average, as traders started to fear that recent heavy rainfall may further delay Soybean plantings as well as potentially harm some of the recently emerging plants. However, overall crop conditions are still very good, and fresh selling has emerged as the November contract moved above the 925.00 area. The 14-day RSI has moved into neutral territory with a current reading of 50.49. In order for bean bulls to re-gain control, we would need to see prices close above the 200-day moving average, currently near the 950.00 area. Support is seen at last week's lows at 886.75.
Mike Zarembski, Senior Commodity Analyst
