Market Strategy: Soybeans: An Olympic Experience

September 7, 2016 02:50 AM
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The soybean chart tells the story of events in soybean pricing over nine to 12 months that, for some, might be similar to participating in the recent Olympics: It evokes the thrill of victory and the agony of defeat.  

Agony Of Defeat. As far back as October 2015, the underlying global demand for soybeans not only was grossly underestimated but was also thought to be easily satisfied by South American crops. Analysts thought Argentina had nearly 750 million bushels of soybeans stashed in bags as a hedge against the peso and was waiting for a change in government and a favorable export tax policy. That erroneous presumption led to estimates that U.S. ending stocks would be 450 million bushels and perhaps 550 million bushels or more for marketing year 2016/17. It didn’t happen. 

A new Argentine president was elected in December, and soybeans suffered a major key reversal lower (see chart below). A few days later, export tax policies changed and soybeans posted a major low, a key reversal higher that has yet to be violated. With 2016 came a stock market retreat and predictions of global economic downturn. It didn’t happen.

A three-month base-building phase set the stage for a recovery that has taken the Dow Jones Industrial Average to new highs. Chinese demand for soybeans increased. Advisories sold any rally, as 
$9 soybeans were supposedly a figment of our imagination. 

An Aug. 24 article in Reuters (“Soybeans trip up top traders, prompt rare offer to U.S. farmers”) reveals those decisions were premature, reportedly leaving much profit on the table.
Thrill Of Victory.
The zenith of bearishness in soybeans came as a classic weather market started to develop April 1. Efforts to justify earlier sales led analysts to blame an irrational market along the way. The rally ended after six weeks. This top coincided with former bear-market enthusiasts turning friendly. 

My experiences in 1983, 1988, 2011 and 2012 helped me ignore cries for doom and gloom. Patience, supply-and-demand understanding and due diligence paid off. Soybeans rallied $2.40 from April 1 to mid-June and $3.40 from mid-December 2015. Prices now threaten a 100% retracement of the April-to-June rally to start price discovery on new fundamentals.   

Survival Strategies. Maybe you bought put options as markets rallied, only to be out of money to buy them again when actually needed. Or you lost money selling cash too soon and buying call options. Worse yet, if you were negatively affected financially by a firm, agony has taken on new meaning in a year where profit opportunities have been scarce. 

Despite a lack of due diligence earlier this year, regulators largely ignore advisory firms. It is risky business and often a matter of timing, as the disclaimer below indicates. Leaving big money (aka profits) on the table affects the ag community directly. No wonder producers are apprehensive about risk managers.

Higher Soybean Prices Surprised Bears
Base-building set the stage for a price recovery to new highs that left buyers short-bought, in a backdrop of unwavering Chinese demand. 


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