China Backing Away From Soybean Purchases
Today's Idea
The potential for increased volatility in the grain markets this summer have many traders nervous about taking on an outright position in Soybean futures. With the current tight Soybean ending stocks and the potential for reduced Soybean acreage, U.S. yields will have to be superb in order to replenish inventories. This scenario could set the stage for sharply higher Soybean prices should it appear that U.S. production will fall short. Some longer-term traders looking for Soybean prices to rise may wish to explore the purchase of a bull call spread in new-crop November Soybeans. For example, with November Soybeans trading at 1343.00 as of this writing, the November 1400 calls could be bought and the November 1600 calls sold for about 45 cents, or $2,250 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $10,000 minus the premium paid which would be realized at option expiration in October should November Soybeans be trading above 1600.00.
Fundamentals
All of a sudden it appears that China has had its fill of Soybeans, at least in the near-term, as the country has started to cancel some of its import commitments. Rising food prices in the country have caused the Chinese government to consider imposing food price controls in order to try to stem rising consumer inflation. Any price controls have the potential to curtail Soybean demand, especially if Soybean crush margins move lower. In addition, the large supply of Soybeans destined to market from South America may continue to shift business to Brazil and Argentina and away from the U.S., as Brazil is expected to produce a record crop. However, longer-term, the outlook for Soybean prices appears supportive, as U.S. producers are expected to shift acreage over to Corn -- or even Cotton, as the current new-crop futures prices make the latter two commodities more attractive for producers than that of Soybeans. However, with U.S. Soybean ending stocks at very tight levels and the potential for reduced Soybean acreage, new-crop Soybeans may need to price in a "risk premium" in case weather conditions turn unfavorable during the growing season and yields disappoint.
Technical Notes
Looking at the daily chart for November Soybeans, we notice a potential double-top formation, as last Monday's move to new highs was met with heavy selling. Some of the selling may be tied to talk that Goldman Sachs issues a sell signal for commodities in the near-term. Another reason for the sell-off may be tied to the less than ideal weather conditions for Corn planting so far this spring. Failure to get Corn planted by May might cause some producers to switch acreage towards Soybeans, which have a shorter growing season than Corn. Prices are now trading below the 20-day moving average, which is viewed as a sell-signal by short-term momentum traders. The 14-day RSI is also showing a bearish divergence, which does add credence to the potential double-top formation. The recent high made on April 11th at 1411.25 should act as resistance for November Soybeans, with major support not found until the March 15th low of 1238.00.
Mike Zarembski, Senior Commodity Analyst
