USDA Report Does Not Dampen Bullish Run In Soybeans

Fundamentals

Soybean traders got some bullish news from the August crop production report released on Wednesday, as the USDA lowered its estimates for the U.S. Soybean crop. The USDA estimated U.S. Soybean production at 3.199 billion bushels, down just over 60 million bushels from the July report and below average analysts estimates of 3.213 billion bushels. Lower yield estimates were responsible for the decline, as the USDA lowered average yield estimates to 41.7, vs. 42.6 in July. Soybean planted acreage increased by a smaller than expected 300,000 acres to stand at 76.8 million acres. Soybean exports are expected to remain robust, with China having just purchased another 113,000 tons of U.S. Soybeans. China may continue to be a major purchaser of U.S. beans this year, as drought conditions in northeast China have traders lowering their estimates of China’s Soybean production this year. The USDA has lowered China’s Soybean production to 15.4 million metric tons, down 0.2 mt from the July estimate. U.S. old crop Soybean carryover is expected to remain at a very tight 110 million bushels, as buyers scramble for adequate supplies before this year’s U.S. Soybean harvest begins.

This tightness can be seen in the structure of the Soybean and Soybean Meal futures markets, which are in a backwardation. A market in a backwardation has the nearby futures priced higher than the more deferred months. In Soybeans, we notice both August and September Beans trading at a much higher price than the new-crop November contract, which should not be a surprise given the tight old-crop carryover. However, what is interesting is that from the Jan 10 contract and beyond, we are also seeing the market in a backwardation for the new crop futures, which infers that traders believe demand will continue to be robust after the U.S harvest is completed and before we see supplies of beans coming in from the southern hemisphere.

Trading Ideas

Given the tight supplies of old crop Soybeans and continued strong export demand, some traders may wish to explore bull spreads in Soybean futures. An example of this trade would be buying September Soybeans and selling November Soybeans. As of this writing, September Beans are trading at a 48 ½ cent premium to the November Beans. Traders buying the spread would want to see the spread differential continue to widen. Risk management is crucial to any successful trading plan, and traders should be aware that spread trading may not necessarily be less risky than holding an outright position, as it is possible for one contract month to be trading higher and another lower simultaneously.

Technicals

Looking at the daily chart for November Soybeans, we notice the 20-day moving average is attempting to cross over the 100-day MA. If successful, this could be interpreted as a bullish signal by momentum traders. However, bulls still have some hurdles to overcome, as the market’s attempt to breakout above the recent consolidation pattern was thwarted by selling pressure yesterday. There is also a bearish divergence forming in the 14-day RSI, which could be signaling that buying pressure is beginning to subside. Wednesday’s high of 1066.00 should act as resistance in the November futures, with support found near the 976.00 area.

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