Expect Short Covering Rally In Soybean Complex
By Mark Soderberg, Archer Financial Services
As spot soybean prices have collapsed by $3.50 per bu. over the past 3 months, we have reached what I consider to be crucial support levels. At just over $11.00 per bu. spot futures prices have retraced 50% of the rally from the Dec-2008 lows near $7.75, to the recent highs at just over $14.50. At the same time, we have witnessed a dramatic shift in ownership in the soybean complex. According to the most recent CFTC data, the Non-Commercial traders (large speculators) were net short 23,500 contracts of soybeans. This is down from their peak of long nearly 150,000 contracts in early Sept-2011. This is their largest short position in nearly 18 months. In soybean oil, the Non-Commercial traders were net short 35,000 contracts, also well below the peak long position of nearly 28,000 contracts in early Sept-2011. This also represents their largest short position since July-2010. In soybean meal, the Non-Commercial traders are net short just over 27,000 futures, well below the long position of nearly 59,000 contracts in early Sept-2011. This represents their largest short position in over 5 years.
SOYBEAN FUTURES - WEEKLY CONTINUATION
Chart provided by APEX
Now I'm not trying to suggest that prices have collapsed solely because the speculators decided to liquidate their long positions and go short. In fact, there are compelling fundamental reasons to support the price plunge. In the Nov-2011 USDA report, the forecast for US ending stocks increased by 35 mil. bu. to 195 mil. bu. While still down from 215 mil. bu. last year, they are still well above levels from the 2008 and 2009 crops. Most likely, this stocks figure will go up further. At the moment, soybean export commitments and shipments are down 34% from last year, while the USDA forecast is for exports to be down only 12%. Also contributing to the lower prices has been growing crop prospects in South America. While still early, as planting progress has just surpassed 50% in both Argentina and Brazil, there are currently no significant moisture shortages. With timely rains in the forecast, it appears favorable for early crop development.
So now comes the question, "Where do we go from here?" It is my suspicion that the recent price collapse has already discounted the bearish fundamentals that were already presented. With soybean and soybean oil prices having traded down to 12 month lows, and soybean meal prices to 18 month lows, I suspect there is very limited downside risk in the short term, even with no change to these current bearish fundamentals. On the other hand, if weather in South America appears more threatening, or if these lower prices start to stimulate an increase in demand, a short covering rally could begin to occur before year-end. I believe a move in spot soybeans to the $12.00 - $12.25 level appears reasonable. My upside target for spot soybean meal is the $320 - $330 area and the $.52 - $.53 level for spot soybean oil.
If you would like more information about these markets, please contact me at 1.800.933.3996 or send me an email to mark.soderberg@archerfinancials.com.
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