Was the Soybean Sell-off a Buying Opportunity?
Today's Idea
Given the potential for increased volatility in Soybean prices, especially as we head into the spring planting season, Soybean option prices appear relatively expensive. Some traders looking to get long Soybean futures but who wish to limit the potential risk associated with taking a long position may wish to explore buying a bull call spread in Soybean futures options. For example, with May Soybeans trading at 1378.00 as of this writing, the May Soybean 1400 calls could be bought and the May Soybean 1500 calls sold for about 25.50 cents, or $1275 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5000 minus the premium paid which would be realized at option expiration in April, should May Soybeans be trading above 1500.00.
Fundamentals
"Risk off" mentality has hit the grain futures markets lately, with May Soybean futures having shed nearly $1.75 per bushel since earlier this month. The major catalyst for the sell-off has been nervousness over the political turmoil seen in the Middle East and North Africa. The unrest has sent oil prices soaring and sparked fears that higher energy prices will put the brakes on the recovering world economy. This fear has sent many large speculators running to the exits, sparking long-liquidation selling in the entire grain complex. Soybean prices have been particularly hard hit, because in addition to speculative selling pressure, a looming large Soybean harvest out of South America, especially Brazil, could help to elevate tight world inventories. There is also concern that US Soybean exports may begin to slow as buyers, particularly China, may shift their purchases to South America. The USDA expects US producers to plant 78 million acres to Soybeans this year, which is up modestly from the 77.4 million acres planted last year. If baseline yield projections hold, the US is likely to produce a Soybean crop of 3.345 billion bushels. The question still remains, however, whether US producers will actually plant that many acres to Soybeans, especially in light of the fact that new-crop Corn and Cotton futures are trading at very attractive price levels. So unless new-crop November Beans start to gain in price relative to Corn and Cotton, the actual number of acres planted with Soybeans may fail to reach USDA projections.
Technical Notes
Looking at the daily chart for May Soybeans, we notice prices falling sharply on high trading volume, as speculators both large and small headed to the exits. Drawing an uptrend line from the lows made back in July of last year, we can see that Wednesday's sell-off to the year's lows was halted almost exactly at the trend line! This level now seems to be an area of good support and a close below this trend line could set-up a test of the November 17th low of 1138.00. However, should prices hold this key support area, which occurred in earnest on Friday, we could see prices move back toward the 1425.00 area. After turning sharply lower last week, the 14-day RSI has moved back to neutral territory, with a current reading of 47.60. Wednesday's low of 1296.25 will remain as support for May Soybeans, with resistance seen at 1425.00
Mike Zarembski, Senior Commodity Analyst
