Grain Trade Subdued Ahead of USDA Crop Report
Friday, December 9, 2011
Soybean futures may have been supported by concerns over weather conditions in South America and potential crop conditions going into 2012. However, should forecasts begin to call for more moisture in the Soybean growing regions in Brazil and Argentina, Soybean futures prices may become vulnerable to increased selling pressure as speculators liquidate existing long positions if recent support levels fail to hold. Some traders who may be anticipating a sell-off in Soybean prices going into 2012 may perhaps wish to explore the purchase of a bear put spread in Soybean futures options. For example, with March Soybeans trading at 1141.00 as of this writing, the March 1100 puts could be bought and the March 1050 puts sold for 14 cent, or $700 per spread, not including commissions. The total investment in the purchase of the spread is the maximum risk on the trade, which has a potential profit of $2,500 minus the premium paid which would be realized at option expiration in February should March Soybeans be trading below 1050.00.
Fundamentals
Sideways to lower prices seems to have been the norm in the grain complex the past several sessions, as traders gear-up for the release of the December Crop Production and Supply/Demand reports due out this morning at 7:30 am Chicago time. For Corn futures, the demand side of the equation has been the focus of the market, as U.S. Corn exports have been lackluster as "cheaper" feed grains from Russia, Australia, and Argentina have hurt U.S. export business. In this morning's USDA report, many traders are expecting a moderate decrease in U.S. 2011/12 Corn ending stocks, somewhere near the 820-830 million bushel level, vs. the 843 million bushel estimate in the November report. Any decrease in ending stocks would most likely be due to increased demand from domestic Ethanol producers and an increase in usage for feed. Global production estimates are expected to be raised as well, which could lead to higher global carry-out totals going into 2012, which will also weigh on U.S. export projections.
Many soybean traders have their focus to the south, as the production output from South America will be widely watch and likely become a key catalyst for whether buyers will favor U.S. or South American Soybeans in 2012. A bumper crop from Brazil and Argentina this season could undercut U.S. Soybean exports, particularly to China, and especially if the U.S. Dollar remains relatively strong. Current expectations are for the USDA to raise U.S. Soybean ending stocks to as high as 220 million bushels, up from 195 million bushels last month due to weak exports. However, weather conditions in Argentina and Brazil have been less than ideal so far, with dry conditions expected to extend into the end of the year. Temperatures have been moderate, however, and that is taking away some of the immediate concerns regarding potential crop production issues. However, any signs of a prolonged drought may spark a "risk premium" into Soybean futures prices.
U.S. Wheat looks to be the weakest performer fundamentally, as the market is still burdened by large global supplies and stiff export competition from South America, Australia, Ukraine, and particularly Russia. The USDA is expected to increase its estimates for global Wheat supplies by nearly 4 million tons from the 202.6 million ton estimate in the November report. Soft Red Winter Wheat (traded in Chicago) is the only one of the major grain futures markets (Corn, Soybeans, Wheat) in which speculators are holding a net-short position, and a bearish USDA report could spark additional selling pressure should recent lows fail to hold.
Technical Notes
Looking at the daily chart for March Soybeans, we notice how steeply prices fell once the highs were made back in September, with prices falling over $3 per bushel in about 3 months time. Since November, prices have remained consistently below the 20-day moving average, with this technical indicator now being a primary focal point to determine if an end to the downtrend may be near. We also see a potential "bear flag" forming, which would confirm the longer-term downtrend is still intact should prices close below the lower line of the flag on higher than average trading volume. Bean bulls will note that there is a bullish divergence forming in the 14-day RSI, which may account for the current price consolidation of the past several sessions. The next support point for March Soybeans is seen at the November 25th low of 1111.75, with resistance found at the December 5th high of 1158.75.
Mike Zarembski, Senior Commodity Analyst
