Will Chinese Buying Revive Soybean Bull Market?

Fundamentals

Despite less than ideal weather conditions as the Soybean crop entered maturity, traders and analysts are expecting an increase in the U.S. Soybean crop estimate when the USDA releases its November Crop Production and Supply/Demand report on Tuesday. Average estimates are for a U.S. Soybean crop of 3.27 billion bushels, or about 20 million bushels higher than the October government estimate. Average yields are expected to have increased by 0.3 bushel per acre to 42.7 bushels per acre. If the predictions hold true, this would be the largest U.S. Soybean crop on record! In addition, Soybean production out of South America is also expected to increase this year. Record U.S. production is expected to replenish carry-out totals for the 2009-10 season, after falling to critical levels this past year. These bearish fundamentals have weighed on Soybean prices the past few weeks, sending January Beans below the 900.00 level briefly before wet weather in the Midwest kept many producers from being able to enter the fields to begin the harvest. This sparked a short-covering rally that has since stalled. Weather forecasts are now calling for warmer and drier weather the next several days, which should allow ample time for harvesting. If there is one bright spot in this seemingly bearish outlook for Soybean prices in 2010 it is that exports remain robust.

On Friday, the USDA announced that 356,000 metric tons of Soybeans were sold to China, and the demand outlook from Far East buyers looks promising, especially given the weakness in the U.S. Dollar. Total Soybean sales now stand at 66.1% of USDA forecasts for 2009-10, which is up over 20% from the 5-year average

Trading Ideas

Soybeans appear range-bound, at least until we get a clearer picture as to how large the U.S. Soybean crop really is. Harvest delays and less than ideal weather late in the growing season may force traders to have to wait until the January Crop report to actually know how large the crop actually is. One possible strategy to take advantage of a market that looks to be moving sideways for the near future could be to sell strangles. An example of this-type trade would be selling the January Soybean 1110 calls in conjunction with selling the January Soybean 850 puts. Both strikes are outside significant support and resistance levels on the daily charts, which if taken-out would negate the sideways chart pattern. With January Soybeans trading at 962.00 as of this writing, this strangle could be sold for 12 cent, or $600 per strangle. Given the potential unlimited risk involved in selling strangles, diligent risk management is crucial. In a scenario such as the above, a trader may choose to exit such a trade before expiration in December, if January Soybeans trade above 1100.00 or below 850.00.

Technicals

Looking at the daily chart for January Soybeans, we notice prices hovering right around both the 20 and 100-day moving averages. This is likely caused by neither bulls nor bears having the upper hand in the short-term, though a series of lower highs and slightly lower lows probably does give an edge to the bears. The 14-day RSI is in neutral to bearish territory, with a current reading of 45.36. Large and small speculators disagree as to the direction of Soybean prices, with large non-commercial traders net long 73,022 contracts and non-reportable traders net short 25,749 contracts, according to the October 30th Commitment of Traders report. Near-term support for January Soybeans is seen at 945.00, with resistance found at 1022.50.

Subscribe by RSS Subscribe by Email