Prepare to Sell into Soybean Rallies

July 11, 2011 09:02 PM
Prepare to Sell into Soybean Rallies

The soybean market has been taking a back seat to corn lately, and soybean prices through most of July likely will stay in their range of recent months.

But volatile futures this month likely will offer opportunities for growers to set a price floor for part of this year's crop.
“You could go to as much as 30% coverage for new-crop marketings,” says Rich Nelson, research director at Allendale, Inc. “But any strategy we recommend this year will have upside involved, meaning it might be an options strategy where you can still gain if the market goes up. We are not recommending any forward cash sales or straight futures sales.”
In the short term, this is the time of year when the soybean market is preparing for the new crop, focusing on forward bookings to China, and getting over heavy exports from South America.
“We still aren't in an exciting time for crop production, which comes in August,” he says.
For the 2011-12 soybean marketing year, Allendale expects U.S. soybean stocks to fall to 168 million bushels, compared with USDA's June projection of 190 million. USDA will issue fresh supply-demand estimates July 12.
“It's not hard to get a 50-million or 60-million-bushel swing in demand,” which could bring carryover next summer close to 100 million bushels, says Nelson.

Funds Bring Opportunities

Tim Hannagan, analyst at PFGBest in Chicago, also sees more bullish supply-demand prospects for 2011-12 than for 2010-11.
For the short term, Hannagan notes that commodity funds don't trade much on supply and demand but are more oriented to technical indicators and weather. “They can over trade weather,” says Hannagan. “You can get some $1 to $1.40 rallies in corn or beans on a weather scare that doesn't really cause damage to yields.” 
He notes that the heat dome in the desert Southwest already spread into the Delta and is headed toward the entire Midwest by mid-July.
“You have to assume that the depth and magnitude of the drought will from time to time radiate into the Midwest, creating fear in the market that needs to be priced in,” Hannagan says. He thinks soybean futures will trade mostly in a $13 to $14 range through July. Depending on how long heat stays in the Midwest, fear-driven rallies could raise futures prices by as much $1.40, but he also thinks funds will take their money out of the market quickly.
“When you get those weather rallies, you have to do some selling,” says Hannagan.

Questionable Crop Ratings

USDA's July 5 Crop Progress report showed 66% of soybeans in the 18 major producing states in good to excellent condition as of July 3. USDA reported blooming ahead of last year and average, and reported strong condition ratings even in Ohio and North Dakota, where planting ran far behind normal.
“We don't believe it,” says Hannagan. “Growers tell you it's not true.” He says the crop condition reports have been losing credibility for several years as federal budgets shifted toward Homeland Security.
“The market is not really trading these numbers like it used to,” he says. Investment funds don't trade based on the crop condition reports, “but they understand weather,” says Hannagan. “They know this is the growing season and a heat dome is coming.”
Even if July is hotter and dryer than normal, soybeans can still produce a record crop if they get timely rains and favorable temperatures in August.

Good Progress in Iowa

Because of the wet year in northwest Iowa, soybean root systems aren't as deep as Iowa State University extension agronomist Joel DeJong would like to see. Soybean plants are small in some fields in his region, but generally they are within normal size range for this time of summer.
For the vast majority of soybeans in his area, warmer weather including warmer nights would be beneficial.
“We're starting with an almost full soil moisture profile,” says DeJong. “There's always potential risk. But right now, we're set up to tolerate heat as long as we don't get a bunch of hundred-plus-degree days.”

For More Information

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