Will New Crop Soybeans Run to $15?
May 23, 2012
Soybean traders continue to fear that a Chinese economic slowdown is going to spill over causing reduced soybean demand down the road. I just don't see it. Sure, we may see some additional purchases go to Brazil during the next couple of weeks, but I am of the belief Chinese demand for US soybeans will really start to pick up form July/August forward. I also believe the USDA is still too high on their Argentina soybean production estimate of 42.5 million metric tons, and expect that it could push down closer to 40 million before it is all over. The question I have now is how long will the window of opportunity last before the trade starts to focus on massive production estimates coming out of South America for next years' soybean crop. Most in the trade seem to be already thinking Brazil will plant an additional 5.5 million acres of soybean acres next year and produce close to 80 million metric tons (Interesting to note a new Reuters survey just released last night showing analyst closer to 74 million). There is also additional talk circulating that Argentina could produce 55 million metric tons. As producers and speculators, we need to find that sweet spot where the market is desperately trying to ration near-term demand but has not yet started to focus on upcoming production. I can tell you right now with prices breaking like they have...we have done absolutely zero to ration near-term demand. My guess is this theme will have to change sooner rather than later. Even though I have reduced my "bullish" soybean rating I believe the market eventually has to trade higher.
My short-term concern in regards to the soybean market is the fact most everyone that wants to be on the bullish soybean train may already be onboard. Understand for prices to continue moving higher we constantly need new traders jumping on the train. With "outside" market uncertainty and fears that Chinese imports maybe slowing, we have seen more guys jumping off the train rather than jumping on. I am NOT saying there are many players taking outright short positions or betting against a soybean rally, all I am saying is that some guys are jumping off the bullish train and closing out their wagers, electing to bank profits or reduce exposure to further price depreciation. Once the market starts to refocus on just how tight the situation has become and the fact there is no alternative or substitute for demand, we may see traders once again jump back on board and prices move higher. As I mentioned months ago, I firmly believe new crop soybeans have a chance to break through $14 and even make a run towards $15, I am however just not certain about how we get there. Do we trade sub $12 before making the run? Do we trade sub $11 before making the run? Considering the length of the funds, either scenario is very possible so make certain you are prepared for extremes that we may encounter.
Corn, especially "old crop," is somewhat of a concern as the basis in Decatur, IL has now fallen to about +$0.55 over. The problem I see though is that with the flat price continuing to break it will do very little to entice more farmer selling. Let's keep in mind the last time we broke down into the $5.80 range in old crop corn we end up seeing significant Asian interest. My bet is we may see the same thing this time around. With domestic Chinese corn prices still extremely high, you can NOT sit here and tell me that China would not like to get their hands on more US corn right now if the price is right. My guess is we are getting extremely close to the "right price." I am going to continue to bargain shop on the breaks just like we did last time down at this level. If you don't want the risk associated with the outright futures, look to pick up some beat-up call premium on the next major leg down. You don't necessarily need to hold it through expiration but rather try and trade it for a double.
***Weather models turning wetter in the near-term for parts of the central Midwest and some additional rains being thrown into the forecast for parts of Russia and Ukraine turn the market upside down. To get specific the GFS weather model basically did a complete 180 by eliminating the "high pressure ridge" past the end of May. In fact they added in a "low pressure system" that could could bring on cooler temps and more significant rainfall. The EU weather model doesn't seem to be in agreement and is leaning more towards continued heat and dryness. In any regards just the thought of cooler temps and rainfall arriving at just the right time was enough to cause the funds to run for cover. From what I heard the funds sold some 25,000 corn contracts, close to 10,000 bean contracts and just over 5,000 CBOT wheat contracts during yesterday's action. There are also rumors that JPMorgan may have forced some commodity liquidations in light of their recent $2-5 billion dollar trading hiccup.
We are making some moves in response to what the market is showing us. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will see where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow" and the Outside Markets. Just click here - Van Trump Report