Clear Fundamentals Spell Call Sellers Market in Soybeans
Despite Seasonal Tendencies and Low Prices, Burdensome Supplies should Keep a Lid on Soybean Prices this Spring
It’s Springtime! A time when Chicago Grain traders traditionally start talking up weather “issues” in soybeans, wheat and corn. “Too dry,” or “too wet” are common mantras this time of year when describing Midwest growing areas. These are often used as excuses to buy and hope. A seasonal price average tends to confirm this phenomenon, whether it be a self fulfilling prophecy or not.
There will no doubt be a time this Spring when somehow, somewhere, somebody thinks it’s too dry or too wet. And on those days or week’s when the market listens to these stories and anxious bears or hopeful bulls start to inch prices up, call buyers will likely take the bait and start buying. When they do you might want to start taking their money. If you do, the fundamentals will be on your side.
For while soybeans may be at “low” prices right now (at least compared to last year) and they do have a seasonal tendency to move higher in Spring, they have one staunch counterweight that is going to be difficult, if not impossible for bulls to overcome: Massive, burdensome supply.
Weather, Seasonals and the South American Factor
There was a time where The US was the dominant player in the soybean export market with Brazil playing a bit role. This meant the focus of prices was predominantly on the US crop. Thus in springtime, soybean prices were very susceptible to any factors that could delay or disrupt US planting. And indeed, even today, soybean and grain rallies are not uncommon during US planting season.
But Brazil now exports more soybeans than the US. Combining this with expanding Argentine exports makes South America a bigger soybean player than the US. South America harvests soybeans from March through May, right when US planting is taking place. Thus, while traders were once focused almost exclusively on US planting progress, they now have to keep one eye on new South American supplies flooding the market at the same time.
In recent years, this factor has served to mitigate to some degree, planting related concerns that may arise in the US. In the years ahead, as South American production continues to grow, the effect will only become more pronounced.South American Soybean production and exports now eclipse that of the US.
April 2015 finds South America in the midst of what is expected to be a record soybean harvest. This includes Brazil producing 94.4 million metric tons (MMT) of soybeans.Brazil posted another record year of production.
Traders looking to buy soybeans because they are “cheap” may want to consider historical supply figures and how prices performed at that time.
At the time of this writing, soybean prices hover near $9.60 per bushel. US soybean ending stocks and stocks to usage ratios are the highest since the 2006/07 crop year, when prices fell below $5.50 per bushel. In that year, ending stocks topped 550 million bushels. Stocks to usage ratio hit a record at 17.5%.
A full discussion of Ending Stocks and Stocks to Usage Ratios and how they affect grain prices is featured in chapter 14 of The Complete Guide to Option Selling – 3rd Edition (www.OptionSellers.com/Book)
To summarize, Ending Stocks measures the amount of product left over at the end of the crop year after all demand has been met.
Stocks to Usage ratio is the Ending Stocks vs. the expected demand of the upcoming crop year.
These are the two most important figures in grain price analysis. As a general rule (although past performance is not indicative of future results and risk is always present) the higher the ending stocks and stocks to usage, the lower the price (and vice versa).
If you’re a soybean bull, you may be looking at this year’s (2014/15) US Stocks to Usage ratio of 10.4% and seeing that while high, it is well below the 2006 record figure. With prices now approaching five year lows, you might conclude that the market has now reached equilibrium or even be undervalued at current levels.US Ending Stocks and Stocks to Usage are the highest since the 06/07 crop year.
But if you jump to Global Soybean Stock figures, a drastically different picture emerges.World Soybean Ending stocks and Stocks to Usage are at All time highs.
Record harvests in Brazil and Argentina, combined with record 2014 US production has resulted in the highest global ending stocks and stocks to Usage on record. If one uses 2006 as a price gauge (when prices fell to $5.50 per bushel), 2015 soybeans still appear overpriced. While present demand probably makes a return to that level unlikely in 2015, global stocks to usage at 31% casts a decidedly bearish pall over the soybean market in the near future.
Conclusion and Strategy
Springtime US planting and a currently oversold market make sporadic rallies in soybean prices likely in the months ahead. However, with massive South American supplies just now beginning to arrive on the world export scene, high US planted acreage projected for 2015 and a wet weather pattern keeping US soil moisture levels at nearly ideal readings, rallies would appear to be selling opportunities.
Without a considerable US weather disruption this spring, soybean prices should continue to consolidate or push lower through the spring and early summer. At the very least, it seems unlikely that beans could stage the kind of sweeping reversal and maintain the kind of subsequent bull market that could make call sellers sweat.
JULY 2015 SOYBEANS
Soybeans are a supply side story and right now, the supplies are simply burdensome. Look to sell call premium high above the market on limited rallies this spring. We like the July contract at this time. However, barring some kind of catastrophic weather event this summer, the September and November contracts could continue to offer call sellers opportunities into the growing season.
We’ll be seeking opportunities for positioning client portfolios in the soybean market over the next several weeks.
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James Cordier is the founder of OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors seeking outsized returns. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television News and CNBC. Michael Gross is an analyst with OptionSellers.com. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014) is available at bookstores and online retailers now. For more information on managed option selling accounts visit www.OptionSellers.com/Accounts ($250,000 minimum investment)
***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.