When a Record Crop May Not Be Enough!
Fundamentals
Soybean traders got a bullish surprise yesterday morning, when the USDA, in its November crop report, shockingly lowered U.S. Soybean yields to 43.9 bushels per acre, down 0.5 bushels per acre from the October estimate. Most traders were expecting a slight increase in yields due to nearly ideal growing conditions this year. The lower average yield estimate caused the USDA to revise downward its estimate for this year's Soybean crop to 3.375 billion bushels, vs. 3.408 billion bushels in October. Although this would still be a record Soybean crop, huge demand for Soybeans, particularity form China, is expected to send U.S. Bean exports to record levels. In fact, the USDA raised its export estimates by another 50 million bushels to 1.57 billion bushels this marketing year. 2010-11 Soybean carryout totals were lowered by 80 million bushels to a relatively tight 185 million bushels. Although the USDA did raise the Soybean production estimates for Argentina and Brazil, the continued weakness in the U.S. Dollar should continue to help bring export business to the U.S., which if it continues, could help support Soybean prices in 2011.
Trading Ideas
With Soybean prices trading at nearly 2-year highs, it appears the bull market is firmly intact. There is major support in lead month January Beans at the chart gap made on October 11th at 1161.00. Some traders who are expecting this support level to hold may wish to explore selling puts with a strike price below this level. For example, with January Soybeans trading at 1326.00 as of this writing, one could sell the January Soybean 1160 puts for about 4 cents, or $200 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized if January Soybeans are trading above 1160.00 at option expiration in December. Given the risk involved in selling naked options, traders may wish to exit the position before expiration should January Soybeans close below minor support near the 1222.50 area.
Technicals
Looking at the daily chart for January Soybeans, we notice the chart gap that started on October 11th and was never filled. Prices moved steadily higher since that time, culminating with yesterday's sharp price spike higher on very heavy volume after the USDA report was released. Speculators are holding a near record long position in Soybeans, and we will need to see further bullish activity to keep the momentum strong and prevent long liquidation selling by weak longs. The 14-day RSI has moved well into overbought territory, with a current reading of 82.93. Traders should watch the action in the U.S. Dollar, as any major rally in the greenback could trigger commodity-wide selling -- including in Soybeans -- at least in near-term. 1350.00 is seen as the next resistance point for January Beans, with support found at 1222.25.
Mike Zarembski, Senior Commodity Analyst
