A Bull Market No One is Talking About?

Fundamentals

With Wheat futures grabbing all the headlines this summer, as the severe drought in eastern Europe and Russia have severely lowered the potential output from this year's Wheat harvest, another member of the grains complex, Soybeans, is also participating in a bull market run. New-crop November Soybeans are hovering near their highest levels of the year, somewhat on the back of Wheat's rapid climb, but also due to their own bullish fundamentals. Well above normal temperatures in the southern sections of the Soybean growing regions of the U.S. have arrived during the key pod setting stage. Too much heat during this stage can ultimately affect yields and force traders to lower production estimates. Even a slight decline in average yields could greatly affect the upcoming season's carryout totals, which is especially important given the current tight old crop Soybean inventories in the U.S. Soybean exports have remained solid, with a weaker Dollar and strong Chinese demand keeping bean exporters busy. Increases in demand for soy products such as meal and oil could also lend support to Soybean prices, with production issues for the oil seed crop in Eastern Europe and Canada potentially increasing U.S. bean oil exports. Soybean meal futures have been trading in a backwardation term structure, where nearby futures are trading at a premium to the more deferred futures all the way out to the May 2011 contract, which is viewed as a bullish signal to many long-time grain traders who follow the adage " to never sell short a market that moves into a backwardation". Grain traders will eagerly await this Thursday's upcoming release of the USDA's August Crop report, which is the first report of the season taken from actual field surveys. Many traders are looking for average yield estimates around 43 bushels per acre, which should be sufficient to help replenish U.S. carryout totals, assuming conditions remain the same. However, should the high heat in the southern growing areas cause average yield estimates to fall even 1 or 2 bushels per acre, we could see another season of tight Soybean supplies, which could be the fuel to keep the Soybean bull market going into 2011.

Trading Ideas

Some traders looking for the rally in Soybean futures to continue but who wish to limit their risk should prices decline could choose to investigate the purchase of a bull call spread in Soybean futures options. An example of this trade would be buying the November Soybean 1050 calls and selling the November Soybean 1100 calls. With the November futures trading at 1033.50 as of this writing, this spread could be purchased for about 15 cents, or about $750 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential profit of $2500 minus the premium paid realized at option expiration in October should November Soybeans be trading above 1100.00.

Technicals

Looking at the daily chart for November Soybeans, we notice prices holding well above both the 20 and 200-day moving averages. The bullish signal has not gone unnoticed by large non-commercial traders. According to the most recent Commitment of Traders report, non-commercial traders, normally large commodity and hedge funds, were net-long 113, 662 contracts as of August 3rd. This was a gain of a whopping 22,867 contracts for the week. Ironically, non-reportable traders, normally small speculators, were net-short 38,768 contracts. This could set the stage for a significant short-covering rally, as the small specs rush to cover their short positions should major resistance at 1049.00 give way. The 14-day RSI is in overbought territory, however, with a current reading of 77.37. Support for November Soybeans is seen at the 20-day moving average near the 990.00 area.

Mike Zarembski, Senior Commodity Analyst