Technically Speaking: What Charts Are Saying!

December 17, 2018 10:26 AM
 
There were a lot of naysayers when the news broke a couple weeks ago that “China would be in for significant amounts of soybeans."  Since then, China took this deal off the table until the famous dinner agreement.

There were a lot of naysayers when the news broke a couple weeks ago that “China would be in for significant amounts of soybeans”; in addition to possible purchases of corn, DDGs and energies (ethanol, Ngas).   As mentioned in previous columns this verbiage is pretty much what was rejected by President Trump back in May.  Since then China has taken this deal off the table until the famous dinner agreement.

The term significant has spurred various opinions and the amount associated with significant is likely in the eyes of the beholder.  A million bushels of soybeans is significant if dumped on the White House lawn, but insignificant in comparison to the 10 mmt (375 mil-bu) of soybeans we are basically short changed in marketing year 2018/19 (the one we are in now).

Even the 1.2 mmt (something under 50 mil-bu is paltry however it is a start and the US and Chinese trade folks are continuing to talk/negotiate.  In response to President Trump saying that additional tariffs would be delayed 90 days, the Chinese did buy soybeans, whether it is for immediate use or for reserves is yet undetermined.  And they did reduce tariffs on US automobile imports for 90 days.  So the 90-day period ahead will be an important one with likely the dribbling out of smaller amounts of buying, hopefully of corn and soybeans of course. 

It is in the best interest of China to see soybean prices supported and to continue the slow release of the buying of US soybeans thus keeping Brazil on edge where the basis there for beans virtually collapsed on the buying news to where the US has lost some of its competitive advantage.  The ultimate step for China would be to drop the 25% tariff on soybeans completely but that isn’t likely until we see more evidence of a good to record crop out of Brazil, a competitive US Insurance number from the February average price of November 2019 soybeans so as to keep US soybean acreage high enough that with an average yield, there will be little concern of a shortage of supplies baring a significant drought reducing situation in N America. 

It seems rather obvious that while the US non-Ag sector may be a winner in the tariff fight no matter how long it lasts, the US farmer has and likely will continue to be a loser with the areas (N Plains) dependent on grains movement out of the PNW the most affected. Even if the US captures the lion’s share of business from non-Chinese companies that would usually buy from Brazil, it will seemingly take a long time, perhaps 3-5 years, for those countries to build their demand sufficiently so as to offset the US loss of Chinese business.

Of course there is always a chance for a weather driven loss of production of even 500 mil-bu that would help significantly.  But if China purchases 350 mil-bu for their reserve, and we hold the other 450-600 mil-bu in stocks, there would be plenty of supplies waiting in the wings to thwart ideas of a big rally due to weather, at least for the first weather shock. 

So what do the charts say?  There was a significant development in soybeans that has to be looked at.  The disappointment of traders that more wasn’t purchased may be short sighted but the price action of soybeans caught my attention nevertheless.

Two weeks ago, soybeans gapped higher on a daily basis to start the month of December.  That “price gap” was made on a friendly, fundamental action and has held through the two weeks post dinner and the buying announcement.   Gapping higher is good.  Turning around and closing near the gap after a brief rally and new-news confirming less than stellar buying is “not so good news” (see chart below).

January 2019 Soybeans

The two week trade since Dec 3rd could take on a couple different scenarios depending on the bias of those trading soybeans.  If January soybeans open below $8.96 ½ there will be the gap higher and then the gap lower leaving what techies call a two—week trading island which could be as negative as the gap higher was when the deal was made.  The trading island would be like saying, “we got a deal and it was a slap in the fact to even putting a dent into a near 1.0 bil-bu US stocks problem; is that all there is”?

Conversely, a gap lower into the former pre-tariff dinner agreement, would give a second chance to those who doubted anything would happen to extend long positions.   In addition those who either would not or could not have a position until something concrete happened would also also have a second chance.

So if the pre-action by China represents a buying opportunity, we need to see the price either not fill the gap or if it does fill the trading gap, to reverse and close stronger.  In other words, the positive thinkers who believe that the US farmers will be made whole again, need company.  

Obviously there is a lot of price volatility ahead as we have not determined the final quantity China will buy neither the price nor do we have a good handle on S American crop, US planted acres, and of course spring weather.   President Trump likes to keep cards close to the vest and so far, it appears to be working, but timing is very important and we’ve (US farmers) lost valuable market share already unless our President’s Trump card is that China buys what we lost (about 350 mil-bu) in soybean market opportunity and does it quickly (90 days) such that bins can be emptied in the N Plains in time for another crop, more price competiveness between planted acres can be seen, and the price of soybeans rally sufficiently for our Ag Secretary to say, “see there is no need for the second half of the soybeans tariff relief payment to be made---we told you we had your back and now we can use those dollars for market penetration or to reduce the debt and the American farmer led the way”.  How good would that be?

Obviously there are multiple actions or reactions to the outcome of the scenarios above but neither time nor my focus of this column permits.  Also there was good action in corn in spite of the soybean price volatility as there was in wheat where finally there may be a crack in the supply-dike of Russia.  This will be the last column until 2019 where in January we get the infamous Jan 12 (or thereabouts) final USDA report on 2018 crops all the while we see S American weather develop and more tariff rhetoric and price response.  

 

The subscription offer mentioned a few columns back will end December 28th. If interested go to info@gulkegroup.com link and leave your contact info, or phone 480-285-4745 or 707-365-0601. 

 

Merry Christmas!  

 

Jerry Gulke. 

 

 


Read more more from Jerry Gulke including his Technically Speaking column and his Weekend Market Report at AgWeb.com/Gulke.

 

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