Lower Production vs. Weak Exports on Traders' Radar for USDA Report
Wednesday, November 9, 2011
Soybean prices may remain under pressure, as both fundamentals and technicals seem to be favoring the bears. Some traders who are expecting for Soybean prices to fall may wish to consider exploring the purchase of a bear put spread in Soybean futures options. For example, with January Soybeans trading at 1211.00 as of this writing, the January 1200 puts could be bought and the January 1150 puts sold for 16 ½ cents, or $825 per spread, not including commissions. The risk on the trade would be the investment in the spread, with a maximum potential gain of $2500 minus the premium paid, which would be realized at option expiration in December should January Soybeans be trading below 1150.00.
Fundamentals
The November USDA crop report may send mixed signals to traders, as analysts weigh potentially lower production figures vs. a weaker export outlook. These mixed fundamentals have led to sideways trading activity during the past several weeks, as neither bulls nor bears could gain momentum. For grain bulls, Corn futures hold potentially the most promise, as traders expect the USDA to lower its estimate for the US Corn crop once again, with an average estimate of 12.4 billion bushels, which is down just over 0.2% from the October estimate. Higher demand for Corn for the production of Ethanol is expected to offset lower Corn export projections, which is expected to show lower Corn carryout totals next year, with many traders looking for 2012 carryout to fall to 800 million bushels.
For Soybeans, some bears appear ready to flex their muscles, with many traders looking for little change in the production estimate calling for a 2011 crop of 3.06 billion bushels. It is in the demand side of the equation where the price outlook dims. A slowdown in Soybean exports and competition from a large South American Soybean crop may allow US inventories to increase, with analysts looking for the USDA to increase US Soybean carryout to 185 million bushels in 2012.
The Wheat market outlook may vary depending on the type of Wheat, as a difficult season in the Northern Plains may force the USDA to cut its estimate of harvested acreage for Spring Wheat traded in Minneapolis. However, stiff export competition from Russia and Ukraine may cut US Wheat export totals. Russian grain exports for the first quarter of the 2011-12 marketing year totaled nearly 10 million metric tons, with the vast majority of the exports being Wheat. Though relatively high Corn prices are expected to shift more feed demand to Wheat in the coming year, current US and global wheat inventories look to be more than ample to meet demand.
Technical Notes
Looking at the daily chart for January Soybeans, we notice what appears to be a descending triangle technical formation having formed the past few weeks. This formation is usually viewed as a bearish continuation pattern and a potential harbinger of lower prices ahead. Prices are currently below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI is reading a bearish to neutral 41.69. Major support in January Soybeans is seen at the recent low of 1163.50, with resistance found at the October 14th high of 1283.75.
Mike Zarembski, Senior Commodity Analyst
