Two weeks ago I wrote an article that touched on selling beans after the December 10 USDA monthly crop report. In my view it represents monthly profit-taking by funds as they always pull profits out after U.S. crop reports as they usually have a measurable rally. They took $.35 off the high of the October report, $.50 off the November report and $.40 off Decembers report.
I discussed the building of bearish demand fundamentals in soybeans lending to a break in prices after the USDA crop report. Coming into December, exports were slightly over the record year prior. Sales are 93% of the USDA 2013-14 forecast.
CHINA IMPACT
But Chinese business is changing. Understand that China imports account for almost 90% of our sales. From October 28 to November 25, grains inspected and shipped averaged 83 million bushels, highs of the year. The average since is only 59 million bushels. Chinese shipments received in the same period went from 57 million bushels to 36 million the last two weeks. Note, shipments are more important now than exports to be determined later because future shipments are expected to be canceled from China if South American weather stays optimal for growing conditions in January and February.
Looking forward, last year’s shipments from December 15 to January 31 averaged 40 million bushels. The recent weekly export sales report showed a Chinese slowdown as well. The last two weeks saw average Chinese purchase for future shipments at 428 thousand metric tons versus the four prior weeks of 969 thousand metric tons. The four-week average in September was 704.
What broke beans down $.20 Thursday after the weekly export sales report release was even though total sales were 1.108 million metric tons, up 38% from the week prior, Chinese purchases were only 558 thousand metric tons, the second lowest in two months and index and trend following funds look to Chinese purchases for direction.
In December of 2012 for instance we had export sales the first two weeks of December at 1.142 million metric tons and 1.319. Then China saw the good weather in South America as nonthreatening to the crops and began to cancel previous US purchases to buy cheaper beans from Brazil for February on out. The last two weeks of December saw 616 and 87 thousand metric tons with the weekly average in January of 612, February 341 and March 305 thousand metric tons.
With good weather in Brazil through mid February, Brazil could produce 10 million metric tons of soybeans more for late February to April delivery. With no genuine weather threat such as a LA-NINA or EL-NINO weather pattern, China may be beginning their seasonal exit from U.S. overbooking of soybeans as insurance against a drought in South America.
The first two days of this week saw soybeans for March delivery touch a daily low at $13.05, but then bounce Monday and Tuesday to challenge $13.35. Recent hotter and drier forecasts for Argentina the likely culprit.
THE TRADE
If the market can hold $13.45 March resistance, I will propose the following position trade. I will look at buying the March Soybean 1250 put and sell the March soybean 1150 put for eight cents, or in cash value for $ 400.00. The risk on the trade is the price paid for the spread, plus all commissions and fees. The maximum profit on the spread is $5,000, that is if both strikes finish in the money at expiration. There is big support down at $13.00, so I am using that level longer term as a possible tipping point, where longs in the market may cover if we settle below it.
For those interested, please join us for our weekly grain webinar series. Walsh Trading’s senior grain analyst Tim Hannagan, who has been rated the number one grain analyst in the United States by Reuters and Bloomberg for his accurate price predictions for both soybeans and corn in 2011 and 2012 will be hosting.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS
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