The beginning of the year has barely begun, and we have seen an active trade in the
grain markets. Soybean futures have particularly caught our attention. March soybean futures have rallied since the low made on December 5, 2008, at $7.79 a bushel. The market has trended upwards since, making a high of $10.60 1/4 on Monday, January 12, which also coincided with the release of the U.S. Department of Agriculture’s (USDA) supply and demand report for January. The USDA report was largely bearish in nature and represented a fundamental shift in the market. The active trade on Monday ended with an outside reversal pattern, and what we see as the beginnings of a possible trend change that corresponds to the bearish fundamental shift.
Among the most important data to be gleaned from the USDA report for the soybean market is the significantly larger ending stocks. The USDA reported the ending stocks of 225 million bushels, a larger number than the 205 million bushels estimated last month, and still larger than the average trade estimation of only 186 million bushels. While the ending stocks represent a rather tight stocks to use ratio of 8 percent, the fundamental outlook as we approach this coming crop year is rather bearish. In general, the demand curve for agricultural products is rather inelastic, meaning that food supplies are difficult to ration whether an economy is strong or not. However, we expect to see a marginally lower demand for livestock feed this year as feed margins and crush margins are squeezed.
Many analysts also expect to see a larger number of acres planted with soybeans this
year compared with last year, thus increasing the probability of significant yields. Additionally, soybeans are also likely to impacted by selling pressure coming from corn and wheat. If the grain markets begin to underperform, it is likely that the index funds will reduce their long positions. Perhaps one of the few supporting fundamental factors has been concern of dry weather in South America and its resulting decline in yields as they approach harvest. However, the significant revision of ending stocks by the USDA pares much of the estimated yield loss in the South American harvest and should the South American weather improve, then this would only serve to place more pressure on the market.
We believe the short-term trend is downward, however, as we approach the beginning of planting in North America. We expect the market to stabilize as the trade begins to add on a weather premium.
March soybeans have been trending upward from early December until
recently. Monday’s USDA report instigated a technical reversal, with an outside reversal seen on that trade day. The market closed limit down at $9.66, then gapped lower on the overnight trade. The trade has subsequently back-and-filled that gap on what we see as a “dead cat bounce.” We feel that rallies will be limited and should be sold. Traders may look to sell the March soybean at $9.90 or better and look to risk the trade to a close above $10.40. We expect to see first support at $9.27 and minor support at $9.00. The downside objective on the market break is $8.56.
Please feel free to call us for more information about this strategy, or for other market-related questions you might have.
Dennis Cajigas is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. Dan Faretta is a Market Strategist with Lind Plus. They can be reached at 866-631-6216. Dennis can be reached via email at email@example.com and Dan can be reached at firstname.lastname@example.org.
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