There Will Be a "Demand" Story for Soybeans
Jul 24, 2012
Soybeans "bears" are talking about the Chinese canceling some new-crop soybean shipments in the Oct-Nov time frame. They are also rejoicing over what they expect to be crop saving rains in the next few weeks. I don't see the break in bean prices being a long-term trend. In my opinion we are eventually going to end up trading a "DEMAND" story rather than a weather related "production" type story. Certainly there has been fear that the US soybean crop is shrinking and this has contributed to the recent run up in price, but in the end I am thinking a world with no real alternative to higher protein is going to be forced to pay higher prices. As I have been saying all along...be patient with this bean market, it is not ALL about the weather. Shrinking production from here can certainly help stoke the flames, but I have to believe this bull fire may last for an extended period of time. Something to consider is that Iowa now has 30% of their soybean crop rated P/VP vs. just 28% rated GD/EX. What I am trying to say is that enough damage has already been done to the US soybean crop (fewer double crop acres than anticipated and possibly fewer harvested acres) not to mention the worst soybean crop condition ratings in the past 20 ears, some obvious yield reductions, fields abandoned, etc... There is no question now that we are going to see record tight global supplies in the months ahead. The South American soybean crop reductions set the stage for this months ago. The poor US growing conditions are simply putting more icing on the cake!
The question from my desk is not really if we are going to see $18 to $20 soybeans, but rather what type of path we going to take getting there. I can't stress enough NOT getting yourself "over-leveraged." This market is going to see some extremely volatile swings, $1 to $3 moves in ether direction can not be ruled out. Keep in mind, the funds are at record length and prices are at all time highs, we are truly in uncharted waters. No one knows how the "intra" and "inter" market spreads are going to react and there is no historical data to provide us with a road map. My best advise is to keep your trading and marketing plan extremely simple. This is not the environment to be messing around with complicated strategies like elaborate ratio spreads or exotic option positions. There is nothing in the world worse than being right about one of the largest bull moves in our lifetime and being in the wrong strategy. I am in one right now myself, as I tried to get cute by going long the March Soybeans against Short March Corn a couple of weeks ago. There is a historical tendency for March beans to gain on March corn, and I was thinking with any type of production setback or planting delays in South America March beans could really explode. To say the least this trade is killing me right now. The money flow has been "bull-spreading" the heck out soybeans, buying the front months and selling the deferred contracts (i.e. long NOV vs short MAR or long JAN vs short MAR). I have had to reduce my positions and lick my wounds, but I will continue to hold in small doses through expiration as I believe eventually soy has to fight for acres and will ultimately gain on corn. Luckily I still remain long the front at price below $13.50, so the profits and diversification have helped offset some of the losses. Until the weather, or should I say yields start to stabilize these markets are going to show very little focus towards "demand." They will also remain extremely unpredictable. In honor of one of my favorite acronyms "KISS," I leave you with the following: "Keep It Simple...Stupid" Trade extremely small, and by all means do NOT get out over the tips of your skis. This means do not try and go any faster than necessary. Travel at a speed you can comfortably control, especially knowing there are going to be extreme downhill runs on the route. Do not put on more positions than you can comfortably afford to feed, the margin call gods will eventually destroy you.
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