If you take a look at the speculative bullish positioning in soybeans, soymeal, and bean oil, you will find that it is at the highest level since early June 2016. In the last week alone, open interest in soybeans surged 92K contracts signaling a surge in buying across the board in a variety of asset classes. Trend following funds increased their long positions alone last week by 37K contracts increasing their net long to 119K contracts. A few causes here for the bean rally with the first being the surprise cut in ending stocks and final U.S. production from the last USDA report. Second and the more likely reason for the rally in my view is the worsening weather in Argentina. Monsoon like conditions in the northern part of the country have wiped out maybe two to three million hectares of soybeans with no chance of replanting, while growing conditions in central and southern Argentina have been plagued by mostly drought. State agencies and private crop forecasts there have lowered estimated production down to 50-51 million metric tons from earlier monthly projections of 57 to 58 million metric tons. It’s a sizable production cut and speaks to the aggressive longs added into the market because of the worsening weather.
Bean demand has waned some since the New Year, but still shows China in buying, just not at the aggressive sales pace seen post U.S. harvest. Export sales last week came in at 979K metric tons with China in for the majority of the sale, which bested expectations. Despite a flash sale announcement on (1/24) from the USDA showing 163K metric tons of beans sold for future shipment to unknown destinations, weather in South America will drive price in the near term. Weather forecasts for this week and the six to ten day forecast show a needed drying out for the water logged areas of northern Argentina, while the drought stricken areas receive rain. Brazil’s weather has been for the most part optimal this growing season in its main bean growing areas where higher yields and production above trend are cited. Brazil’s largest bean growing area Mato Grosso harvest stands at 13 percent ahead of last year’s five percent. The Brazilian production results so far have many thinking that it will be enough to offset the anticipated Argentinean bean losses, leaving the market over valued at over 10.50 on the board. Last year at this time beans were trading in the low 9.00’s with U.S. ending stocks at 200 million bushels. This year we have a carry at 420 million. Should this significant weather premium that’s been built into the market fall apart, look for spot bean prices to challenge the 10.00 level quickly. To take advantage of a potential move, look to buy a March bean 10.30 put for eight cents or better into February.
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